Understanding Fallen Angels
A fallen angel in the financial realm refers to bonds that have descended from the heavenly realm of investment-grade ratings to the more terrestrial realm of junk status. The term captures the dramatic fall of these bonds due to the deterioration in the issuer’s financial health. It’s a bit like watching a corporate Icarus—it flew too high and got burned, financially speaking.
Definition
Originally sanctified with an investment-grade rating, these bonds lose their halo when agencies like Standard & Poor’s, Fitch, and Moody’s reassess the issuer’s ability to meet debt obligations, landing them in the purgatory of high-risk investments. They might hail from diverse domains—be it corporate, municipal, or even sovereign debt.
From Halos to Hazards: The Transformation
The malign force behind this downgrade is typically a significant drop in revenues or an increase in debt, compounding the risks and reducing the bonds’ luster. The fall from grace turns these bonds into pariahs, often shunned by investors whose policies restrict them to virtuous, investment-grade instruments.
The Diverse Realm of Risks and Rewards
Investing in fallen angels is not for the fainthearted. While they offer higher yields—like a siren’s call to the yield-hungry sailor—they also carry higher risks. You might find a treasure, or you might find a trap.
Market Dynamics: Angels in Disguise?
Despite their tarnished status, fallen angels can sometimes be hidden gems. Post-downgrade, these bonds often suffer from overselling, resulting in undervalued prices. For the astute investor, this can spell opportunity. Imagine buying a piece of heaven at earthly prices—that’s the allure of fallen angels if the issuer’s fortunes reverse.
Heavenly Funds with Earthly Returns
For those not wanting to pick individual bonds, there are celestial choirs in the form of ETFs and bond funds specializing in these fallen creatures, such as the VanEck Vectors Fallen Angel High-Yield Bond ETF or the iShares Fallen Angels USD Bond ETF. These funds gather a host of these fallen beings, offering a diversified way to engage with this high-yield domain.
Apocalyptic Warnings: Not All Angels Ascend Again
Just like the mythical phoenix, some fallen angels rise from the ashes, while others smolder into oblivion. A company that fails to innovate or adjust to market changes might never recover its lost glory. Remember the tale of VCRs? Exactly. Likewise, fiscal mismanagement could lead municipalities or nations into a debt spiral with no resurrection in sight.
Lessons from Above
Investing in fallen angels requires a balance of wisdom and courage—the wisdom to discern potential from peril, and the courage to act when others shy away. It’s a financial test of faith, with the possibility of both redemption and ruin.
Further Reading
To navigate the highs and lows with fallen angels, the following books might light your path:
- “High Yield Bonds: Market Structure, Valuation, and Portfolio Strategies” by Theodore Barnhill
- “Investing in Bonds For Dummies” by Russell Wild
- “Junk Bonds: How High Yield Securities Restructured Corporate America” by Glenn Yago
Related Terms
- Junk Bonds: High-risk bonds typically offering higher yields due to their lower credit quality relative to investment-grade bonds.
- Investment-Grade Bonds: Bonds rated at a minimum ‘BBB-’ by major rating agencies, reflecting a lower risk of default.
- Credit Rating: An assessment of the creditworthiness of a corporation or sovereign issuer, influencing their access to borrowing and terms.
- High-Yield Investments: Investments that offer higher returns due to higher risks, often associated with lower credit ratings.
Enlighten yourself with knowledge of fallen angels, and may your investments have wings strong enough to weather the storms of financial markets!
