Capital Markets

Number of “Fallen Angels” Soars to 18-year Record

Issuers of downgraded or speculative-grade debt now number 75 worldwide, representing $174 billion, S&P says.
Stephen TaubFebruary 23, 2009

Although investors are clearly warming up to the market for new corporate issues, credit quality in general for existing paper continues to deteriorate. The number of potential “fallen angels” has reached an 18-year high, according to a new report from Standard & Poor’s.

Fallen angels are issuers downgraded to speculative grade (BB-plus and lower) from investment grade (BBB-minus and higher). Rising stars, as they’re called, move in the opposite direction.

According to the credit rating agency, 75 entities worldwide, representing debt topping $174 billion, were identified as potential fallen angels in the most recent month. This compares with an average of 47 potential fallen angels per month in 2008.

S&P said that their number has increased steadily since the second quarter of 2007, a trend it deems likely to continue as recessionary economic and credit conditions worsen to their eventual trough. Through Feb. 9, S&P had lowered the ratings on eight issuers to the speculative-grade universe, affecting debt worth $32.88 billion. They include American General Finance, the largest fallen angel so far this year based on rated debt volume. Others included Sealed Air, Colonial BancGroup, and Continental AG.

S&P believes the sectors poised to lead fallen-angel incidence in the future include non-water utilities with nine entities, followed by consumer products with eight entities and finance companies and media and entertainment with seven entities each. French building materials company Lafarge S.A. is the largest potential fallen angel, with $14.76 billion in rated debt, according to S&P.

The rating agency explained that over the long term, fallen-angel activity mirrors the broader movement in credit quality, as measured by the ratio of downgrades to total rating actions. In addition, global fallen-angel activity compares fairly well with general economic trends in the U.S. and worldwide, it said.

“In other words, fallen-angel activity generally increases during periods of weak real GDP growth and declines when GDP is strong,” according to S&P. “This inverse correlation is not surprising because companies’ aggressive leverage at the peak of the economic cycle makes them vulnerable to potential credit downgrades when economic conditions deteriorate, resulting in an increase in fallen angels in and around troughs in the economic cycle.”