Why Billions in Bonds Now Trade Like ‘Fallen Angels’

Being a fallen angel is not a good thing, whether in the Bible or the bond market. For investors, a fallen angel is a company that has lost its investment-grade debt ratings -- a fall that can have costly consequences. The ranks of that category may be about to get far more crowded, as new economic woes push nearly $1 trillion of debt owed by companies that are currently barely above that level closer to the line. The market has already made up its mind on roughly a third of that, trading the bonds as if they’ve slipped into junk status, even if credit raters haven’t made that call.

Generally speaking, a fallen angel is a bond that is downgraded to BB+ or below (categories considered junk, or, more politely, high yield) by at least two of the three major rating firms -- Moody’s Investors Services, S&P Global Ratings and Fitch Ratings -- after being formerly rated BBB- or higher (categories that are investment grade). Downgrades can happen when a company isn’t creating enough revenue or generating enough cash to service its debt, or when it takes on so much debt that its financial leverage -- usually calculated by debt as a measure of earnings -- becomes disproportionate.