The topic of fallen angels – issuers downgraded from investment-grade status – attracted much attention last year. Of course, this is not surprising: the number of companies downgraded from investment grade to high yield reached an all-time high in 2020. This changed the composition of the high-yield universe, with BB-rated credits now the average rating in the index for the first time ever. In turn, this resulted in a universe where the average size of a capital structure is now larger and there is a higher percentage of publicly listed companies.
Since then, the pace of downgrades has slowed: companies raised a significant amount of liquidity, while their management teams had time to adjust their businesses to coronavirus-related challenges. Indeed, the investment community has recognised this progress, with fallen angels outperforming the wider BB-rated segment of the market by more than 5% in the last 12 months (see figure 1). The return, in excess of 14%, was also much better than returns in other parts of the credit market last year. That said, it is important to note that the fortunes of the best-performing segment of the credit market outside of fallen angels have already changed course: will 2021 be the year of rising stars?
Figure 1. Fallen angels outperformed BB-rated bonds in 2020
Source: Federated Hermes, ICE Bond Indices, as at January 2021. Past performance is not a guide to future performance.