08 Credit Sights Fallen Angels & Rising Stars

Fallen Angels

Bonds downgraded from investment grade (BBB- or better) to high yield (BB+ or lower).

Fallen Angels Causes

• Idiosyncratic: company decisions like acquisitions funded by debt or maintaining dividends despite poor cash flow.

• Macroeconomic: e.g., COVID-19 pandemic (2020) caused a wave of downgrades.

Investor Concerns

• Downgrades lead to forced selling from investment-grade accounts.

• Results in spread widening before and after downgrade.

• A large wave of fallen angels could destabilize the smaller high yield market.

• BBB market > $4 trillion vs. smaller BB market, amplifying potential volatility.

Rising Stars

Bonds upgraded from high yield to investment grade (BB+ or better to BBB- or better).

Rising Stars Drivers

• Companies improve fundamentals post-downgrade.

• New companies prove strong creditworthiness post-issuance.
  

Fallen Angels & Rising Stars - Fill in the Blanks Question

• A company is a fallen angel if it is BLANK to high yield from investment grade. 

Downgraded

During 2020, what percentage of the investment grade bond market was affected by fallen angel downgrades?

• 1%

• 3%

• 5%

• 10%

3%

Fallen Angels & Rising Stars - Fill in the Blanks Question

• Spreads of bonds that the market believes could be downgraded to HY from IG tend to BLANK before the downgrade. 

Spreads of bonds that the market believes could be downgraded to HY from IG tend to WIDEN before the downgrade. 

Which factors can lead to a company being classified as a fallen angel?

• Improvement in credit metrics and fundamentals

• Withdrawn ratings

• Large acquisition funded by new debt

• Declining cash flows with preserved equity dividends

• Large acquisition funded by new debt

• Declining cash flows with preserved equity dividends