Fallen Angels: Is the Curve Flattening?

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Fallen Angels – companies whose credit quality has shifted from investment-grade to high-yield or “junk” status – continue to grow in number but at a slower pace than what we’ve been seeing for the past several months.

Each month, Credit Benchmark tracks a global sample of corporations across all sectors to gauge the percentage of firms at risk of losing their investment-grade status. This month’s report captures consensus credit data for 6,894 companies that were classed as Investment-grade as at end-Feb 2020 and finds that 772 (about 11%) are now classified as High Yield, according to the internal risk views of over 40 leading global financial institutions. This is an increase of 93 compared to the previous update and 214 compared to the update before that. Of the 32 sectors examined, 15 have a higher percentage of Fallen Angels than the average for the full sample.

Travel & Leisure continues to occupy the top slot, with the highest percentage of Fallen Angels at 41%. The second and third positions are still held by Leisure Goods and Industrial Metals & Mining, but their percentages are unchanged at 32% and 25%, respectively.

Aerospace & Defense continues to see deterioration, with 21% of firms now classified as Fallen Angels. Following that are Personal Goods at 19% and Automobile & Parts at 17%.

Also struggling are Media, General Retailers, and Oil & Gas Producers with 16%, 15%, and 15% of firms now classified as sub-investment-grade.

Among the best-performing sectors – those with the lowest percentage of Fallen Angels – are Fixed Line Telecommunications and Health Care Equipment & Services (each at 4%), Gas, Water, & Multi-utilities at 3%, and Electricity at 2%.

As previously noted, widely cited research suggests up to one third of all corporate bonds with the BBB designation might shift to “junk” status, despite a possible reluctance on the part of agencies to downgrade. Consensus credit data from Credit Benchmark supports this thesis.

The credit sample examined above is based on issuers instead of issues and includes all investment-grade companies, not just BBB. Still, the growing Fallen Angel rates shown here that covers the first six months of the COVID crisis indicate that the shift for some sectors by the end of 2020 may be yet higher than has so far been suggested. This is true even if the pace of growth is slowing.

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Credit Benchmark brings together internal credit risk views from over 40 leading global financial institutions. The contributions are anonymized, aggregated, and published in the form of consensus ratings and aggregate analytics to provide an independent, real-world perspective of credit risk. Risk and investment professionals at banks, insurance companies, asset managers and other financial firms use the data for insights into the unrated, monitoring and alerting within their portfolios, benchmarking, assessing and analyzing trends, and fulfilling regulatory requirements and capital.