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Surge in Fallen Angels Expected Amid Economic Uncertainty

September 13, 2024

Read Time 5 MIN

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 negative outlook, which places it on the verge of a BBB- rating, suggest growing concern. We are closely monitoring Boeing (Capital Goods sector), Centene (Healthcare) and Paramount (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

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 BB1 Real Estate REITs 2.18 88.05
February Advance Auto Parts Inc. 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 BB1 Leisure Gaming 3.12 93.19
March Enlink Midstream Partners LP BB1 Energy Gas Distribution 2.30 88.92
April FirstEnergy Corp. BB1 Utility Electric-Integrated 6.62 87.10
April Rolls-Royce PLC BB1 Capital Goods Aerospace/Defense 1.51 96.00
July Delta Air Lines Inc. 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.

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Important Definitions and Disclosures

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third-party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the Fund may be subject to risks which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, energy sector, consumer discretionary sector, information technology sector, financials sector, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund.

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 (BB) 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.

ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Associates Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.

Important Definitions and Disclosures

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third-party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the Fund may be subject to risks which includes, among others, high yield securities, foreign securities, foreign currency, credit, interest rate, restricted securities, market, operational, call, energy sector, consumer discretionary sector, information technology sector, financials sector, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount and liquidity of fund shares, non-diversified, and index-related concentration risks, all of which may adversely affect the Fund.

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 (BB) 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.

ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Associates Corporation, Distributor, a wholly-owned subsidiary of Van Eck Associates Corporation.