Fallen angels are almost twice as likely to default as original high-yield issuers during the first three to four years following a downgrade, according to a first-ever Standard & Poor's study tracking 24 years worth of fallen angel rating behavior. The study comes amid credit markets rattled by forecasts General Motors will soon become the next major fallen angel and speculation over how its descent to junk will unfold. While the study breaks down its findings into industry sectors, Diane Vazza, managing director of global fixed-income research at S&P, declined to speculate on specific credits such as GM.
S&P's study reveals that auto fallen angels descend slower than do those from other sectors, on average at a rate of 0.18 downward rating notches per year, resulting in a 9.2% default rate. At the other end of the spectrum, telecom fallen angels spiral downward an average of 2.56 notches per year and have a 45.5% default rate.
Additionally, around 18.4% of fallen angels became rising stars in the three years following downgrade, greater than the 12.5% of original high-yield issuers who ascended to investment-grade, according to S&P. Year-to-date fallen angels include Delphi Corp., Liberty Media and Intelsat.
The report had been in the works for several months in light of the growing concentration in the crossover universe, explained Vazza. "That double- and triple-Bs account for half of the corporate bond market [prompted the study]," she said, adding companies are increasingly managing their balance sheets more toward a crossover rating than a single-A. Vazza noted this priority shift is an important trend that has happened gradually.
