Note: This article is courtesy of Iris.xyz

By Mark Germain

“Fallen angels.” It sounds like a catchy title of a John Grisham novel. It’s not, but maybe some day it will be, if you could work a mysterious murder involving a bond trader into the plot.

A fallen angel is a bond that began its life with an investment-grade rating (i.e. a Standard and Poors BBB rating or above), but was subsequently demoted from angel status.

Often a fallen angel will, before dropping from investment heaven, start out with a very long-term high rating–possibly AAA. Then, the issuer has gone through a shaky period, leading to a downgrade, or a series of downgrades. But when looking at the situation, it’s important is to make a careful distinction between the fallen angel bond itself, and the issuer.

It is not the issuer that’s the fallen angel, but the specific bond issue at hand. That means that the issuer’s fortunes could improve, and goes back to the bond market with a new offering that receives an investment grade rating, even as the earlier “fallen angel” bond is still bearing a lower credit rating.