Definition of Fallen Angel
A bond that is at first given the classification of an investment-grade bond but the same has been reduced to the status of a junk bond due to the downfall in the financial condition of the issuing company is referred to as a Fallen Angel. The term ‘Fallen Angel’ is occasionally used to represent that stock that has fallen hastily from its peaked standard.
The reason behind the downfall of the investment-grade bonds is the irregularity of revenue which makes the condition of the issuer worst due to which it is unable to pay the interest that is due on bonds. Such type of securities attracts the investors with the attitude of rejecting popular opinions or a contrarian willingness to capitalize by believing that the company will cope up from these temporary obstacles. The issuers of fallen angel are generally large institutions having a wide area of network and privileged brand names. Thus, they have the potential to bounce back to the investment rating class.
Characteristics of a Fallen Angel
Following are some of the salient features of a fallen angel:
- The fallen angel bonds are sold in the market in bulk quantity.
- They attract investors who trade with speculation purposes.
- Fall in the results of the investment-grade bond results in the downfall in the status of the company.
- The fallen angel bonds give the highest rate of return but the risk involved in it is comparatively more.
- A fallen angel is such a bond that is turned down to junk status due to the financial deterioration of the issuer.
List of Fallen Angel Companies
Here are some of the examples of fallen angel companies:
- Kraft Heinz
- Delta Air Lines
- Royal Caribbean Cruises
- Spirit Aero Systems Holdings
- Patterson- UTI Energy
- EQM Midstream Partners, LP
Fallen Angel Chart
Here, you can have a look at the price chart of a fallen angel security.
As evident from the chart, the prices were on a decline initially and struggling over time. After a period of few months, the prices seem to be moving upwards and hence benefitting the stakeholders.
Risks of Fallen Angels
Investment-grade bonds that are reduced to junk bonds due to the inefficiency of the issuer to pay interest dues decrease the price of the company’s bonds which attracts the contrarian investors as they believe in the possibility of the company to cope up a temporary reversal.
But not every company can cope up with such setbacks which may be due to the change in taste of the customers, or any other ever-lasting impact. In such cases, the investors investing in such companies have to bear a heavy loss. Due to the financial position of such issuing companies, there is always a great level of risk in fallen angels.
Recoveries of Fallen Angel
Following are the instances which can most effectively result in the successful recoveries of fallen angel
- Change in the division/segment of the business: The reduction in the investment-grade bond might happen due to a part of the business causing loss. Such part of the business can be revised to recover the fallen angel. Such restructuring of underperforming segments can contribute to effective recovery from financial distress.
- Trimming in the expenditure: The fallen angels can be recovered if there is an appropriate reduction in the expenditures of the company, which includes the employment of fewer workers with comparatively more workload than before. A company may also limit its resource expenses by having a negotiation with the supplier regarding cost.
- Change in the structure of capital utilization: The fallen angels can be recovered if the capital involved in the company is used in the right way. A capital can yield more profit only if it is used properly and at places that can yield profit. This involves the effective utilization of the capital by the de-allocation of funds from less profitable areas to a comparatively more profitable segment.
Investing in fallen angles offers the following advantages:
- Big opportunity: The fallen angels give a huge opportunity to the investors but they are risky also. Investors can earn high returns if they are ready to take the underlying risks.
- Higher interest: The interest rate in the fallen angels is pretty much high. Investors can earn a high rate of interest on their investments if they invested in the fallen angels as compared to investing in other schemes.
- Low price bonds: The bonds of the fallen angel company are of priced less due to the reduction in the value of an investment-grade bond. This allows investors to earn a high return in less investment.
- Temporary setback: Usually companies keep a fund to recover themself from future losses. The good company always has a backup plan, so they know how to recover from temporary setbacks.
High risk goes hand in hand with high profitability. There is a high risk in the fallen angels and any investor looking to invest in them must consider the risk factor. But if the investor is ready to take the risks, then the investor can earn a high rate of return; it is like gambling as it attracts the speculators. An investor may earn through investing in fallen angel bonds by buying them just before or after their degradation because by this time the prices of these bonds are lowest. As and when the fallen angel would recover their increasing prices, they may lead to a benefit on the part of the investor. Thus, having in-depth market knowledge and appropriate scenario analysis may help you to earn more and more as a life-changing opportunity always a decision away.
This is a guide to Fallen Angel. Here we also discuss the definition and characteristics of a fallen angel along with advantages. You may also have a look at the following articles to learn more –