What will come into your mind if you see the term Fallen Angel?
Lucifer, who fell from heaven and became a devil in hell. The name of Lucifer refers to “morning star” or “light-bringer”. However, now Lucifer is associated with Satan.
There are many films and TV series, movies about Lucifer. I bet you all are familiar with him and the term fallen angel.
In economics, we have fallen angel as well. Like Lucifer, it refers to something which is pretty good at first, then worse off as time goes by.
A fallen angel is a bond or a stock that performs badly. Bonds are usually graded by a rating service, such as Standard & Poor’s and Moody’s Investors Service. If a bond has been downgraded significantly mainly due to the decline in revenues and difficulties in repaying the debts, it is called a “fallen angel.” Fallen angel bonds can be corporate, municipal or sovereign debt.
Pay attention, there’s a difference between fallen angel bonds and value stocks, which is undervalued but the issuer has the potential to get profits.
Though being downgraded by a rating service, some investors still find fallen angel bonds attractive. Because issuers will add repayment guarantee clauses to contracts to enhance bondholder confidence thus protect investors from high risks. The grade may also lead to lower face value of the bond. Therefore, if investors are seeking to capitalize on the potential for a recovery of the issuer, they will hold the bond and wait.
For example, if the bond issued by an oil company is downgraded due to the losses of revenue caused by the falling of oil prices, the prices of the bonds would decline, and yields would increase. This will make some investors interested in the bonds, because they see low oil prices as a temporary condition.
Some investors do earn money from buying fallen angel bonds. However, more investors failed. It is important for you to analyze an issuer and its bonds to decide whether to sell or not.