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Fallen Angel



Definition

A fallen angel is a term used in the finance world to describe a bond that has been downgraded from an investment-grade status to a speculative or non-investment grade status, typically due to a decline in the creditworthiness of the issuer. This downgrade is usually triggered by factors like deteriorating financial conditions, increased risks, or operational challenges faced by the issuer. Fallen angel bonds may offer higher yields than investment-grade bonds, but they carry higher risk due to the issuer’s weakened financial state.

Phonetic

The phonetic spelling of “Fallen Angel” using the International Phonetic Alphabet (IPA) is: ˈfɔlən ˈeɪndʒəl.

Key Takeaways

  1. A fallen angel is what? A bond that has been downgraded from investment grade to junk status is known as a fallen angel. As a result, the bond is now thought to be riskier, and investors may want a higher yield to make up for the additional risk.
  2. Why does a connection turn into a fallen angel? Several factors can cause a link to turn into a fallen angel. These consist of:
    1. The issuer’s creditworthiness deteriorating.
    2. A shift in the economic climate.
    3. A credit rating agency downgrading.
    4. Investment hazards associated with fallen angels.
  3. Investments in fallen angels might be dangerous because they have a higher default rate than investment-grade bonds. They may, however, also present the possibility of higher harvests.

Importance

The term “Fallen Angel” is important in the business and finance world as it refers to a bond, initially issued with an investment-grade rating, that has subsequently been downgraded to a high-yield or junk bond status due to the weakening of the issuer’s financial condition. This change in rating can significantly impact the issuer’s borrowing costs, investor sentiment, and overall stability of the company. Additionally, fallen angels can create opportunities for value-oriented investors who believe the downgraded bonds are mispriced or the issuer will recover, providing potentially higher yields than other bonds with similar ratings. Consequently, understanding the concept of fallen angels is crucial for informed decision-making in both primary and secondary bond markets.

Explanation

A Fallen Angel, in the context of the finance and business world, serves as an indicator for investors and market participants to assess the creditworthiness and financial stability of a particular corporate entity or investment instrument. It is crucial to track such instruments, as they can represent potential investment opportunities for investors who are willing to accept higher levels of risk in exchange for possible high yields. The term denotes a bond or a company that has experienced a downgrade in their credit rating, falling from an investment-grade status to a speculative, high-yield or “junk” status by prominent credit rating agencies like Standard & Poor’s, Moody’s, or Fitch. This downgrade often results from deteriorating financial conditions or increased likelihood of default, and it has a significant impact on the perception of the instrument’s quality and risk profile. The purpose of identifying Fallen Angels is to assist investors in making informed decisions about their investments, offering them insights into the credit risk and potential returns that these financial instruments might come with. Investors could find opportunities in Fallen Angels, as their prices tend to be depressed following the downgrade, and the higher yields associated with junk status can appeal to those with higher risk tolerance. Moreover, if a company is able to improve its financial standing and regain investment-grade status, early investment in the Fallen Angel could yield significant returns as the bond’s price appreciates in response to the improvement in credit quality. Thus, tracking Fallen Angels and their subsequent performance presents an opportunity for investors to engage in a high-risk, high-return strategy in the constantly evolving financial market landscape.

Examples

A “fallen angel” in business/finance typically refers to a bond that was initially issued with an investment-grade rating but has since been downgraded to a junk bond or non-investment grade due to the issuing company’s declining creditworthiness. Here are three real-world examples: 1. Ford Motor Company (2005): Ford was once an investment-grade issuer but was downgraded to a “junk” or non-investment-grade rating in 2005 due to declining market share, high debt levels, and weakening financial performance. Following the downgrade, Ford bonds became an example of fallen angels. 2. Petrobras (2014): The Brazilian state-owned oil company, Petrobras, was downgraded in 2014 due to its increasing debt, falling crude oil prices, and involvement in a high-profile corruption scandal. As a result, the company’s bonds were reclassified as fallen angels. 3. General Electric (2018): GE bonds were considered to be a prime example of a fallen angel when the company faced financial difficulties and its long-term debt was downgraded from A to BBB+ by S&P Global Ratings in 2018. The downgrade reflected concerns about GE’s substantial debt, shrinking cash flow, and struggling power division.

Frequently Asked Questions(FAQ)

What is a Fallen Angel in finance and business terms?
A Fallen Angel refers to a bond or debt instrument, initially issued as an investment-grade bond with a high credit rating, but has since been downgraded to junk or non-investment grade status due to the issuer’s deteriorated financial condition or increased risk of default.
What causes a bond to become a Fallen Angel?
A bond may be considered as a Fallen Angel due to various factors such as the issuer’s decline in revenues, increase in debt levels, negative industry trends, lower credit ratings, or adverse macroeconomic conditions that jeopardize the issuer’s ability to meet debt obligations.
How can I identify a Fallen Angel?
To identify a Fallen Angel, monitor credit ratings assigned by rating agencies such as Standard & Poor’s, Moody’s, and Fitch Ratings. If a bond drops from investment-grade (usually a rating of BBB- or higher) to non-investment grade or junk status, it is considered a Fallen Angel.
Are there any advantages to investing in Fallen Angel bonds?
Yes, Fallen Angel bonds have the potential to offer higher yields compared to their investment-grade counterparts due to increased perceived risk. Some investors may find them attractive due to their potential for price recovery if the issuer’s financial condition improves or market sentiment changes.
What are the risks involved in holding Fallen Angel bonds in my investment portfolio?
Holding Fallen Angel bonds in your portfolio can expose you to higher default risk, credit risk, and interest rate risk. Additionally, these bonds may suffer from liquidity issues and market volatility, making it challenging to sell them during times of financial distress or market downturns.
Are there any investments or mutual funds that focus specifically on Fallen Angel bonds?
Yes, there are investment vehicles and mutual funds that focus on Fallen Angel bonds. These funds typically employ active management strategies to identify and select Fallen Angels with the potential for recovery or capital appreciation. Examples of such funds include the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) and the BlackRock Global Funds – Global Fallen Angels High Yield Bond Fund.

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