For income-hungry investors that have hoovered-up corporate debt in recent years, this really matters.
Call me nostalgic, but investment grade (IG) credit just isn’t what it used to be.
Theoretically, IG bonds and borrowers are highly unlikely to default. In practice… well, we all remember those triple-A mortgage backed securities during the credit crunch, don’t we?
Triple-A-rated borrowers perch at the top of the IG credit tree. On the lower branches sit the triple-Bs, which hover just above the riskier ‘high yield’ or ‘junk’ status.
So triple-Bs live on the edge: modest economic changes can reduce their creditworthiness, triggering downgrades to ‘junk’. These are called ‘fallen angels’.
Many investment fund mandates prevent them holding ‘junk’ bonds. This means that ‘fallen angels’ can quickly create forced selling in credit markets.
