Why Fallen Angels Can Be a Good Catch

22 May 2020

1 min read

An Expected Surge in Fallen angels: The More, The Merrier

Historical analysis does not guarantee future results.
As of March 31, 2020
US Corporation represented by Bloomberg Barclays US Corporate
Source: Bloomberg Barclays, ICE BofA, JP Morgan, Moody’s and AllianceBernstein (AB)

Even in good times, it’s not unusual for companies clinging to the bottom rung of the investment-grade ladder to become fallen angels. Yet concerns surrounding fallen angels are especially pronounced today, and not just because of the coronavirus pandemic and concurrent oil crash. During the past decade, the volume of debt rated BBB—the lowest rank of investment grade—ballooned as a share of the investment-grade universe as issuers ramped up their leverage.

Given the sudden onset of liquidity challenges and reduced access to capital in today’s environment, we estimate that 8.5% of the US investment-grade corporate market will be downgraded below investment grade. This is close to the experiences in past crises, such as the 2002 recession (10%) and the Great Recession (8%). However, because today’s investment-grade corporate market is four times as large as in 2008, our US fallen angel forecast is for around $450 billion by volume. The actual figure so far in 2020 has already surpassed $150 billion.

The potential for a blizzard of fallen angels to overwhelm the high-yield market has exerted downward pressure on both bonds rated BBB– and the highest-rated high-yield bonds. A wave of downgrades from investment grade to high yield could lock in losses for restricted investment-grade strategies and spark a disruptive repricing in the high-yield market as it digests a supersized volume of incoming debt.

But for investors who can hold them, owning some angels after they’ve fallen may make sense. This is because fallen angels tend to enter the high-yield universe undervalued relative to their credit fundamentals and often end up performing very well. This has held true even following a sizable surge in volume. The Great Recession, for example, saw a big increase in the volume of fallen angels; in 2009, total returns on fallen angels surpassed 60%.

For high-yield investors, that’s an opportunity worth exploring.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

This is a marketing communication. This information is provided by AllianceBernstein Limited, 60 London Wall, London, EC2M 5SJ. Registered in England, No. 2551144. AllianceBernstein Limited is authorised and regulated in the UK by the Financial Conduct Authority (FCA - Reference Number 147956). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results. This information is directed at Professional Clients only and is not intended for public use.

Why Fallen Angels Can Be a Good Catch

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