Last week’s news that Moody’s had upgraded Ford Motor Company to investment-grade status marked the latest step in a remarkable turnaround for the company. This was the second such upgrade to Ford’s debt in as many months, following a similar move by Fitch in April.
The turnaround and eventual upgrade of Ford highlights the opportunities that can exist in the high-yield corporate bond universe generally (see High-yield bond ETFs backed by cash-rich corporates) – and in particular the segment known as “Fallen Angels.” Fallen Angel is a term used to refer to below investment-grade corporate bonds that were rated investment grade at the time of issuance.
Until this latest upgrade, Ford was one of the larger names in the Fallen Angel segment of the corporate high-yield bond market, which currently accounts for approximately 15% of the dollar-denominated high-yield bond universe.
Some of America’s best-known companies are considered Fallen Angel issuers. Companies in this segment include names such as JC Penney, Toys R Us, the New York Times Company and Sprint. Typically, Fallen Angels tend to be concentrated towards the higher-quality end of the high-yield market and are thus often favoured by investors seeking higher yields but who do not want to take on too much extra credit risk.
Commenting on the upgrade, Francis Rodilosso, manager of the Market Vectors Fallen Angel High Yield Bond ETF (ANGL), said: “Expectations have been high that a second major credit rating agency would follow suit and upgrade Ford’s debt, following the decision by Fitch, so the news is one more way in which the company is being recognised for having improved its operating results while simultaneously building a strong cash position and lowering its net debt. While concerns remain, particularly with regard to the company’s pension liabilities, Ford nonetheless stands as an excellent example of a ‘Fallen Angel’ regaining its investment-grade status.”
Reflecting on the potential for further credit upgrades in the segment, Rodilosso added: “We believe Ford is certainly not alone in being well-positioned to shed its Fallen Angel status, as many issuers in this category still retain the capital structure that they had in place when they first earned investment-grade status. That, combined with other positive factors, could potentially make certain Fallen Angels more likely to be upgraded in the future.”
Investors can access Fallen Angel bonds via the NYSE-listed Market Vectors Fallen Angel High Yield Bond ETF (ANGL). ANGL, which launched in April this year, is first US-listed ETF focused specifically on dollar-denominated Fallen Angels.
For investors preferring to buy a UK or European-listed fund, the following ETFs listed on the London Stock Exchange (LSE) provide exposure to the wider high-yield corporate bond universe, which includes the Fallen Angel segment:
US High Yield
Pimco Short-Term High Yield Corporate Bond Index Source ETF (STHY)
iShares Markit iBoxx $ High Yield Capped Bond ETF (SHYU)
European High Yield
SPDR Barclays Capital Euro High Yield Bond ETF (SYBJ)
iShares Markit iBoxx Euro High Yield Bond ETF (IHYG)
Lyxor ETF iBoxx EUR Liquid High Yield 30 (YIEL)