Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Sumit Desai, CFA | 06-11-2015 02:00 PM

Should You Invest in Fallen-Angel Bonds?

Cast out of the investment-grade market, these securities offer unique appreciation potential and exposure to the high-quality end of the junk-bond spectrum, says Van Eck's Francis Rodilosso.

Sumit Desai: Hi, I'm Sumit Desai--senior fixed-income analyst with Morningstar's manager research group. Joining me today is Fran Rodilosso, senior investment officer for fixed-income ETFs with Van Eck.

Fran, thank you for joining me today.

Francis Rodilosso: Thanks, Sumit. Thanks for having me.

Desai: We're here today to talk about the Market Vectors Fallen Angel High Yield Bond ETF (ANGL). Can you talk a little bit about what a fallen angel is and the role that a fallen-angel bond or issuer plays within the high-yield market?

Rodilosso: Fallen angels are bonds that were originally issued as investment-grade bonds. So, the issuer typically has gone through some type of credit issue that's led to a downgrade--or series of downgrades--that's brought the bond into the sub-investment-grade universe. Interestingly, fallen angels are bonds, not the issuers themselves. So, if an issuer issues a bond after their credit rating is sub-investment-grade, that bond would not be considered a fallen angel.

How do fallen angels fit into the general context of the broader high-yield market? Well, they were the original high-yield bonds; the original junk bonds were fallen angels. Today, they make up about 13% of the broader U.S. high-yield universe, so there is a lot more original-issue high yield out there now than there are Fallen Angels.

Desai: Given your comments and given that sometimes a bond will become a fallen angel if there is a deteriorating credit-quality issue, what makes this segment so attractive for investors?

Rodilosso: What happens is that there is usually some type of credit deterioration that has led to the downgrades; but consistently, fallen angels have remained in the BB category. So, versus a broader high-yield market, it generally has remained a higher-quality segment of the high-yield universe.

Also, there is a little bit of a value proposition in how it all plays out. In other words, as credit-rating downgrades are anticipated by the market, usually those bonds lose a significant amount of the value that they're going to lose by the time the downgrade actually happens.

So, by the time they enter this index, which is the month after the downgrade that puts them into the high-yield category, I think Merrill Lynch did a study once that said the bonds have typically lost about 80% of the value that they lose in total. But a key component is that today the Fallen Angel Index is about 80% BB issuers--BB+, BB-, or BB--versus about 47% of the broader high-yield market.

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article