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High profile fallen angels becoming rising stars, says MarketVectors’ Rodilosso

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Market Vectors’ international high-yield corporate bond ETF portfolio manager Fran Rodilosso has commented on what he sees as the major themes and trends shaping the “fallen angels” segment of the US high-yield corporate bond space.

Fallen angel is a term used to describe a bond that was rated as investment grade at the time of its original issuance, but which has since lost its investment grade status. Currently, fallen angels account for approximately 15 per cent of the US dollar denominated high yield bond universe.

“We have already seen some high-profile fallen angels ‘re-ascend’ this year, known as ‘rising stars,’ including USD8bn in Ford Motor bonds and USD700m in Pioneer Natural Resources bonds,” says Rodilosso.

“Rising Star” is the opposite of fallen angel, and describes a bond with a credit rating that has been upgraded and has the potential of becoming investment grade.

“The overall ratio of upgrades to downgrades has decreased over the course of 2012, but we have not seen explosive growth in the number of bonds moving into the fallen angel category, at least not yet.

“While I believe that we could see growth in the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), which underlies our Market Vectors Fallen Angel High Yield Bond ETF (ANGL), over the next six to 12 months,” says Rodilosso. “I also think that if overall credit quality remains strong, the index has the potential to perform well relative to high-yield and crossover investment alternatives.”

Rodilosso pointed to the fact that in recent months some large US banks, such as Bank of America and Citibank, have tendered for and called a significant amount of Tier 1 capital issues that were fallen angels ahead of regulatory changes taking effect next year. “I believe that these calls reflect the US banks’ improving balance sheets,” he added.

“Still, according to Merrill Lynch, as of July 2012, there is USD73bn of investment grade bonds with a rating in the lowest investment grade category that are on negative outlook, i.e. fallen angel candidates,” says Rodilosso. “That is almost twice the number of ‘rising star’ candidates. But despite the shift towards downgrades, default rates among all high yield issuers still remain far below the 4.5 per cent historical average, though I believe they could tick up to the 3.0-3.5 per cent range by the end of the year.”

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