Why ‘Fallen Angels’ Are a Bond Market Preoccupation

Xerox Corp. is the latest big-name American company to join an inauspicious club. Its bonds completed a fall from investment grade to junk status on Dec. 18, making them what’s known as “fallen angels.” There’s concern that the ranks of fallen angels will be growing in coming months, especially if the U.S. economy moves further toward recession.

Generally speaking, a fallen angel is a bond that is downgraded to BB+ or below (junk) by at least two of the three major rating firms -- Moody’s Investors Services, S&P Global Ratings and Fitch Ratings -- after being formally rated BBB- or higher (investment-grade). Downgrades can happen when a company isn’t creating enough revenue or generating enough cash to service its debt, or when it pursues financially aggressive policies to appease shareholders and takes on so much debt that its financial leverage -- debt as a percentage of the company’s overall capital structure -- becomes disproportionate.