The Angel That Wasn’t

By Fran Rodilosso via

The cautionary advice to “expect the unexpected” makes a lot of sense for investors—at least in the sense that we should all learn to manage our own expectations by realizing there are outcomes we may not have anticipated. Sudden defaults by investment grade rated issuers would fall into this category, given their rare occurrence.

At VanEck we are anticipating a pick up in the volume of fallen angels, or investment grade bonds being downgraded to high yield status, in 2019. Our theory is not that we will see a systematic turn in the credit cycle that causes a massive wave of BBB-rated debt to fall into the high yield universe, but that we will see a variety of idiosyncratic situations develop.

From Fallen to “Failing”

One such situation occurred this month as a direct result of the very tragic wildfires that struck California over the last two years. Pacific Gas and Electric (PG&E), with nearly $18 billion in bonds1 in the ICE BofAML US Investment Grade Bond Index, is facing upwards of $30 billion in legal claims, which would render the utility insolvent. A series of downgrades by multiple agencies have brought the issuer’s rating quickly down from a BBB- to C during just the first two weeks of January.2 The bonds are effectively fallen angels, or as ICE BofAML more aptly labeled them in a recent note, “failing angels.” On January 14 the company announced that it would seek Chapter 11 protection as soon as January 29. On January 15, the company declined to make an interest payment due on one of its senior unsecured bond issues. PG&E’s debt prices have fallen significantly.

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