What Is a Fallen Angel?
A fallen angel, in the investing world, is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status. The downgrade is caused by a deterioration in the financial condition of the issuer. The term is also sometimes used to describe a stock that has fallen precipitously from its all-time highs.Fallen Angel Explained
Fallen angel bonds have been downgraded by one of the major rating services, which include Standard & Poor’s, Fitch, and Moody’s Investors Service. They may be corporate, municipal, or sovereign debt.
Key Takeaways
- A fallen angel is a bond that has been reduced to junk status because its issuer has fallen into financial trouble.
- Its bonds pay higher returns than investment-quality bonds but are riskier.
- Some bond funds and ETFs focus on fallen angels.
Fallen angel securities are often attractive to contrarian investors seeking to capitalize on the potential for a company to recover from a temporary setback. Under these circumstances, the downgrade process usually starts with the company's debt being placed on a negative credit watch. That alone forces many portfolio managers to sell their positions, as their governing rules may forbid holding them.
Junk Status Drives Selling
The actual downgrade to junk status drives more selling pressure, particularly from funds that are restricted to holding investment-grade debt exclusively. As a result, fallen angel bonds can present value within the high-yield category but only if the issuer appears to have a reasonable chance of recovering from the conditions that caused the downgrade.Fallen Angels Funds
There are even fallen angel bond funds for investors who spot opportunity at a fire sale. The VanEck Vectors Fallen Angel High-Yield Bond ETF invests only in bonds that have been downgraded. As of September 2021, its holdings included bonds from Sprint Capital Corp., Vodafone Group PLC, and Freeport McMoran, among others. There also is the iShares Fallen Angels USD Bond ETF which, as its name suggests, invests only in dollar-denominated fallen angels.