Capital Markets

A New Flock of Debt’s Fallen Angels

S&P's global tally of additional securities headed for speculative ratings rises to 10, from 8 a year ago, with Sprint topping the list.
Stephen TaubApril 15, 2008

Here’s another example of impact from the months of credit-market turmoil: Ten global entities became potential “fallen angels” in the first quarter, representing rated debt worth $16.2 billion.

The slide of more companies toward speculative ratings appears in the latest tally from Standard & Poor’s Global Fixed Income Research Group, which said that in the first quarter of last year there were eight new potential fallen angels reported.

What’s more, S&P identified 38 entities now evaluated as having speculative ratings, representing debt totaling $82 billion. The average count of fallen angels over 2007 was 39, S&P said.

Sprint Nextel Corp. is the largest potential fallen angel, with more than $24.25 billion in rated debt, according to the report.

Fallen angels are issuers downgraded to speculative grade (BB and lower) from investment grade (BBB- and higher). So-called rising stars, of course, move in the opposite direction.

Sectors poised to lead fallen-angel incidence include forest products and building materials and utilities, with five entities each. Retail and restaurants and consumer products trail with four entities each, and the transportation sector, typically more susceptible to recession risk, also shows a high likelihood for downgrade pressure, according to S&P.

Not all of the news here is gloomy. In the first quarter, 12 entities moved in the reverse direction, to investment grade from speculative grade.

Fallen-angel incidence peaked in 2002, when 130 fallen angels were recorded–including entities with or without any rated debt–constituting 4.07 percent of the 3,196 investment-grade issuers.

The previous peak was in 1986, when 52 fallen angels were recorded, constituting 3.92 percent of investment-grade issuers.

“Over the long term, fallen angel incidence mirrors the broader movement in credit quality with the correspondence of the peaks and troughs between these two trends,” S&P notes in its report. “Moreover, global fallen-angel incidence compares fairly well with general economic trends.”

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