Search this website. You can use fund codes to locate specific funds

Weekly Credit Insight

Chart of the week: fallen angels descend

The unprecedented and largest-ever rebalancing of the high-yield index is now behind us. So far, the market has absorbed the fallen angels – issuers downgraded from investment-grade status – in an orderly fashion. This is in part due to the Federal Reserve’s pledge to support fallen angels, as well as improving market sentiment.

The global high-yield index has expanded by nearly $200bn to $2.3trn. Its underlying composition has also changed and BB-rated credits now make up more than 60% of the index, compared to 40% before the financial crisis.

As expected, the largest number of downgrades came from the energy and automotive sectors. Both industries are in the eye of the storm and currently account for a quarter of all volatility in the high-yield market1 (see figure 1).

Figure 1. Risk by sector in the high-yield market

Source: ICE Bond Indices, as at May 2020.

The sectors are also home to a number of weaker investment-grade companies, particularly in the US. Formulating views on these industries will be important over the next six to 12 months, as both offer a good mixture of risks and opportunities (find out more by watching our latest Industry Insight).

The rebalancing also accelerates the transition from a high-yield market that is dominated by smaller leveraged buyouts to one that is focused on larger multi-layered global capital structures. The average size of a capital structure has almost doubled from about $800m during the financial crisis to $1.5bn today.

We will likely see more downgrades as earnings season gets underway, meaning that fallen angels will continue to change the shape of the high-yield market. As the asset class becomes increasingly global and characterised by large-cap companies, an unconstrained approach to credit investing should help investors seek out opportunities in the months ahead.

  1. 1As measured by duration times spread

More Insights

From Buddha to Bagehot: how global banks are keeping the liquidity flowing
If liquidity is the ineffable essence of being for banks, its absence presents an existential threat.
Biodiversity in focus in EOS’s Q3 Public Engagement Report
Why companies need to stop taking nature for granted
Weekly Credit Insight
The interest-rate sensitivity of credit has increased.
The Meeting Room Webcast: Global Emerging Markets, October 2020
As we navigate the ever-changing landscape of the coronavirus, the Global Emerging Markets team reflect on recent performance, and discuss the outlook for Global Emerging Markets from both a market and portfolio positioning perspective.
Global Emerging Markets positive impact case study: Advantech
Through its IoT business, Advantech contributes to the attainment of the SDGs
The red and the blue – updates from the US, October 2020
In this webcast, Clive Selman, moderates a discussion with colleagues Phil Orlando and Steve Chiavarone to hear their thoughts on the US elections and the impact on 2020’s final quarter and beyond.