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With higher rates pressuring balance sheets and economic uncertainty ahead, U.S. companies at risk of downgrade have risen to $93B from $19B in January, while the risk of rising stars remains relatively low.
Fallen angels (as represented by the ICE US Fallen Angel High Yield 10% Constrained Index, “H0CF”) and broad high yield (as represented by the ICE BofA US High Yield Index, “H0A0”) performed relatively in line in August, 1.53% vs 1.59%, with fallen angels trailing the broad market by 1.45% YTD (4.84% vs 6.29%). The CCC & Lower rated index continues to outperform Single-B and BB rated bonds (9.65%, 5.94% and 5.67%, respectively). This lower quality outperformance has been supported by resilient U.S. growth data and the Consumer Price Index (CPI) reporting below 3% for the first time in three years, strengthening the case for a potential rate cut in September. Weaker employment figures have also lent support for a rate cut, although the implications on lower rated credit are likely less positive.
Are Fallen Angels Coming?
August was the seventh consecutive month with no downgrade activity, with Advance Auto Parts the most recent fallen angel in February. However, Bloomberg recently predicted that the high yield market may experience an increase in fallen angels due to increasing economic uncertainty and negative outlooks for specific sectors. With elevated interest rates pressuring balance sheets, Bloomberg estimates that U.S. companies at risk of downgrades has risen to US$93 billion, up from US$19 billion in January, while rising star risk is relatively low, as seen on the chart below. The last time the amount of fallen angels was this high, according to Bloomberg, was in 2020, which turned out to be the calendar year with the largest amount of debt downgraded.
Rating agencies appear to be recognizing signs of credit deterioration among higher-rated issuers. Recent actions, such as Intel’s downgrade to BBB+ and CVS’s (CVS) negative outlook, which places it on the verge of a BBB- rating, suggest growing concern. We are closely monitoring Boeing (BA) (Capital Goods sector), Centene (CNC) (Healthcare) and Paramount (PARA) (Media), as these issuers also face a higher likelihood of downgrades to high yield. If downgraded, they could significantly impact the fallen angel index, potentially hitting the 10% issuer weight cap.
Rising-Star, Fallen-Angel Candidates
Source: Bloomberg Intelligence, August 20, 2024.
Fallen Angels Overall Statistics: Fallen angel yields decreased in August by 16bps to 6.65%, just 4bps above their 12-month low, while the average price increased to $92.88, a level not seen since August 2022. Broad high yield saw similar changes, with yields decreasing 27bps and the average price increasing to $95.47. The move down in yields/jump in prices continues to reflect the 10-year U.S. Treasury rallying since April, when it reached 4.70% and ended August at 3.91%, while spreads have generally stayed range-bound.
| Fallen Angels | Broad HY | |||||||
| 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | |
| Yield to Worst | 6.99 | 7.10 | 6.81 | 6.65 | 7.69 | 7.94 | 7.61 | 7.34 |
| Par Weighted Price | 91.20 | 90.32 | 91.90 | 92.88 | 91.86 | 92.98 | 94.37 | 95.47 |
| Effective Duration | 5.41 | 5.08 | 5.06 | 5.01 | 3.31 | 3.26 | 3.17 | 3.07 |
| Full Market Value ($mn) | 67,821 | 55,371 | 54,885 | 55,634 | 1,237,721 | 1,266,993 | 1,282,279 | 1,307,475 |
| OAS | 285 | 252 | 259 | 263 | 339 | 321 | 325 | 317 |
| No. of Issues | 143 | 126 | 122 | 122 | 1,837 | 1,863 | 1,858 | 1,863 |
Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Broad HY: ICE BofA US High Yield Index. OAS refers to “option-adjusted spread.” Please see definition for this and other terms referenced herein in the disclosures and definitions portion of this blog. Past performance is no guarantee of future results. Index performance is not representative of strategy performance. It is not possible to invest in an index.
Fallen Angels: No fallen angels in August.
| Month-end Addition | Name | Rating | Sector | Industry | % Mkt Value | Price |
| January | Hudson Pacific Properties LP (HPP) | BB1 | Real Estate | REITs | 2.18 | 88.05 |
| February | Advance Auto Parts Inc. (AAP) | BB1 | Retail | Specialty Retail | 2.52 | 91.20 |
Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.
Rising Stars: No rising stars in August.
| Month-end Exit | Name | Rating | Sector | Industry | % Mkt Value | Price |
| February | Las Vegas Sands Corp (LVS) | BB1 | Leisure | Gaming | 3.12 | 93.19 |
| March | Enlink Midstream Partners LP (ENLC) | BB1 | Energy | Gas Distribution | 2.30 | 88.92 |
| April | FirstEnergy Corp. (FE) | BB1 | Utility | Electric-Integrated | 6.62 | 87.10 |
| April | Rolls-Royce PLC (OTCPK:RYCEF) | BB1 | Capital Goods | Aerospace/Defense | 1.51 | 96.00 |
| July | Delta Air Lines Inc. (DAL) | BB1 | Transportation | Air Transportation | 1.50 | 94.59 |
Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Past performance is no guarantee of future results. Not a recommendation to buy or sell any of the names/securities mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.
Fallen Angels Performance by Sector: There were no major sector allocation shifts within fallen angels, but when compared to broad high yield, fallen angels are heavily overweight Banking, Retail, Real Estate and Telecom while underweight Services, Autos and Media. In August, fallen angels saw general price improvements across most sectors with Telecom, Financial Services and Healthcare performing particularly well in terms of price recovery. In terms of total return, all sectors, except for Transportation, posted positive returns in August with Telecom, Financial Services and Healthcare having the highest total returns, mostly driven by price appreciation and spread tightening.
| Wgt (%) | OAS | Price | Total Return | ||||||||||
| 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | MTD | |
| Banking | 4.79 | 5.38 | 5.47 | 5.48 | 231 | 220 | 229 | 229 | 97.91 | 97.36 | 98.48 | 99.58 | 1.58 |
| Basic Industry | 1.70 | 3.73 | 3.81 | 3.79 | 171 | 156 | 174 | 173 | 97.24 | 95.03 | 96.14 | 97.24 | 1.55 |
| Capital Goods | 5.85 | 5.41 | 5.44 | 5.46 | 200 | 161 | 195 | 188 | 97.34 | 97.51 | 97.31 | 98.46 | 1.64 |
| Consumer Goods | 4.33 | 5.28 | 5.52 | 5.45 | 230 | 240 | 208 | 242 | 94.29 | 93.64 | 96.63 | 96.22 | 0.10 |
| Energy | 14.75 | 12.27 | 12.55 | 12.49 | 259 | 239 | 242 | 247 | 92.49 | 93.44 | 95.25 | 95.68 | 0.93 |
| Financial Services | 1.14 | 1.37 | 1.39 | 1.41 | 378 | 376 | 355 | 334 | 86.41 | 84.87 | 87.60 | 89.81 | 3.03 |
| Healthcare | 4.10 | 5.15 | 5.34 | 5.39 | 270 | 207 | 202 | 184 | 88.73 | 91.12 | 93.11 | 94.91 | 2.35 |
| Insurance | 1.32 | 1.65 | 1.69 | 1.70 | 323 | 238 | 244 | 239 | 94.10 | 96.11 | 98.02 | 99.42 | 1.97 |
| Leisure | 7.90 | 5.92 | 6.05 | 5.98 | 228 | 180 | 196 | 210 | 93.21 | 94.48 | 95.26 | 95.41 | 0.57 |
| Real Estate | 9.07 | 10.07 | 10.58 | 10.40 | 675 | 450 | 385 | 415 | 82.72 | 84.76 | 88.18 | 88.24 | 0.47 |
| Retail | 14.38 | 20.45 | 19.39 | 19.13 | 242 | 196 | 232 | 251 | 86.39 | 88.19 | 87.49 | 87.26 | 0.16 |
| Services | 0.64 | 0.79 | 0.79 | 0.80 | 243 | 206 | 204 | 188 | 94.78 | 94.67 | 96.48 | 97.91 | 1.92 |
| Technology & Electronics | 6.22 | 6.67 | 6.79 | 6.81 | 194 | 184 | 207 | 195 | 94.14 | 92.27 | 92.85 | 94.23 | 1.90 |
| Telecommunications | 13.00 | 11.10 | 11.88 | 12.40 | 366 | 413 | 396 | 362 | 92.22 | 81.48 | 86.34 | 90.86 | 5.79 |
| Transportation | 2.09 | 2.60 | 1.10 | 1.08 | 209 | 150 | 249 | 281 | 94.92 | 96.07 | 99.28 | 98.27 | -0.49 |
| Utility | 8.71 | 2.17 | 2.22 | 2.22 | 139 | 185 | 206 | 210 | 92.18 | 96.23 | 97.19 | 98.24 | 1.50 |
| Total | 100 | 100 | 100 | 100 | 285 | 252 | 259 | 263 | 91.20 | 90.32 | 91.90 | 92.88 | 1.53 |
Source: ICE Data Services, VanEck. Returns are based on partial period data. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index.
Fallen Angels Performance by Rating: No significant changes in the fallen angels rating allocation in August, as there were no new fallen angels or rising stars, however, within the fallen angel index, Dresdner Funding Trust I, EQM and Telecom Italia were upgraded by one notch within the BB rated bucket to BB1, BB1 and BB2, respectively. BB1 now represents approximately 33% of the fallen angel index, three times more than what it is in the broad high yield index, offering a compelling case for investors who still think of a hard landing in the coming months. In terms of performance, lower quality issuers outperformed in August as they saw their spreads tightened while BB and single-B rated issuer spreads widened during the month.
| Wgt (%) | OAS | Price | Total Return | ||||||||||
| 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | 12/31/23 | 6/30/24 | 7/31/24 | 8/31/24 | MTD | |
| BB | 80.55 | 87.62 | 86.83 | 86.60 | 219 | 210 | 220 | 224 | 92.44 | 92.62 | 93.84 | 94.52 | 1.17 |
| B | 13.43 | 7.89 | 8.05 | 7.92 | 317 | 371 | 358 | 392 | 96.46 | 90.73 | 91.76 | 91.88 | 0.62 |
| CCC | 5.44 | 4.19 | 4.45 | 4.50 | 1,130 | 505 | 481 | 465 | 69.40 | 80.90 | 84.64 | 86.70 | 2.97 |
| CC | 0.30 | 0.67 | 0.99 | 5,719 | 2,603 | 1,729 | 13.00 | 29.14 | 43.48 | 49.22 | |||
| Total | 100 | 100 | 100 | 100.00 | 285 | 252 | 259 | 263 | 91.20 | 90.32 | 91.90 | 92.88 | 1.53 |
Source: ICE Data Services, VanEck. Fallen Angels: ICE US Fallen Angel High Yield 10% Constrained Index. Not intended as a recommendation to invest or divest in any of the sectors mentioned herein. Index performance is not representative of strategy performance. It is not possible to invest in an index. BB index: ICE BofA BB US High Yield Index; Single-B index: ICE BofA Single-B US High Yield Index; CCC & Lower rated index ICE BofA CCC & Lower US High Yield Index.
Important Definitions and Disclosures
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A fallen angel bond is a bond that was initially given an investment-grade rating but has since been reduced to junk bond status.
High yield bonds may be subject to greater risk of loss of income and principal and are likely to be more sensitive to adverse economic changes than higher rated securities.
An option-adjusted spread (OAS) is the difference between the yield of a security that pays fixed interest payments and the current U.S. Treasury rates, which represents the rate of return on a risk-free investment.
A rising star is a high yield bond that is upgraded to investment grade.
Duration is an estimate of how much the value of a bond portfolio would be affected by a change in prevailing interest rates. The longer a portfolio’s duration, the more sensitive it is to changes in interest rates.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. Investors cannot invest directly in the Index.
ICE BofA US High Yield Index (H0A0, “Broad HY Index”), formerly known as BofA Merrill Lynch US High Yield Index prior to 10/23/2017, is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, “Fallen Angel Index”) is a subset of the ICE BofA US High Yield Index and includes securities that were rated investment grade at time of issuance.
Fallen Angel U.S. High Yield index data on and prior to February 28, 2020 reflects that of the ICE BofA US Fallen Angel High Yield Index (H0FA). From February 28, 2020 forward, the Fallen Angel U.S. High Yield index data reflects that of the ICE US Fallen Angel High Yield 10% Constrained Index (H0CF). Fallen Angel U.S. High Yield index data history which includes periods prior to February 28, 2020 links H0FA and H0CF and is not intended for third party use.
ICE BofA US High Yield (BB): ICE BofA US High Yield (B) Index is comprised of below-investment grade corporate bonds with BB ratings (based on an average of various rating agencies) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofA US High Yield (Single-B): ICE BofA US High Yield (Single-B) Index is comprised of below-investment grade corporate bonds with single-B ratings (based on an average of various rating agencies) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofA US High Yield (CCC & Lower): ICE BofA US High Yield (CCC & Lower) Index is comprised of below-investment grade corporate bonds with ratings of CCC or below (based on an average of various rating agencies) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
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