What is an Angel Bond
An Angel Bond is an investment-grade bond that pays a lower interest rate because of the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which are bonds that were originally investment-grade but have been downgraded to a "junk" rating, and are therefore much more risky.
BREAKING DOWN Angel Bond
Angel bonds receive investment-grade credit ratings that can range from a high of AAA by S&P and Fitch and Aaa by Moody’s to the minimum investment-grade ratings issued by each service of 'BBB' by S&P and Fitch, and 'Baa' by Moody's. If the company's ability to pay back the bond's principal is reduced, the bond rating may fall below investment-grade minimums and become a fallen angel.
Angel bonds are most commonly used as a point of reference when describing fallen angels. The latter have “fallen” by seeing their credit ratings descend through the various levels of investment-grade ratings into the below-investment grade area, also referred to as high yield or junk ratings categories. Fallen angels differ from other high yield bonds that were originally rated below investment grade.
A bond rating is a grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's Investors Service and Fitch Ratings Inc. provide these evaluations of a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion.
Credit ratings generally reflect a relative ranking of credit risk. For example, an obligor or debt security with a high credit rating is assessed by the credit rating agency to have a lower likelihood of default than an issuer or debt security with a lower credit rating.
Examples of Downgraded Angel Bonds
Fallen angel bonds tend to be larger and more well-established companies that have experienced financial difficulties such as declining sales, increased competition or rising debt that has negatively impacted their ability to repay debt obligations.
Retailer JC Penney is an example of a once strong company that has become a fallen angel. JC Penney was coming off record holiday sales and maintained an investment grade A rating from S&P in 1997 when it became the only retailer out of a group of angel bond issuers to sell 100-year bonds. But plunging sales caused by missteps in pricing and marketing as well as failed attempts to attract more affluent shoppers caused the company’s bonds to lose their investment grade rating over the next decade and fall deep into junk bond territory.
Other angel bonds that have been downgraded to below investment grade ratings include Ford, Sprint and Gap.