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What is a Fallen Angel?

A fallen angel is a bond which once carried a high rating and displayed exceptional performance, but has since experienced a serious sustained decline in ratings and market demand.

How Does a Fallen Angel Work?

For the last five years, the Standard & Poor's agency gave Company XYZ an investment-grade rating of A, meaning it believes XYZ is a quality company with low credit risk. After a major shift in the economy, Company XYZ experienced a dramatic decrease in their sales numbers for three consecutive quarters. As a result, Standard & Poor's downgraded Company XYZ's credit rating to CCC, a junk-bond status reserved for speculative companies that could possibly not make its debt commitments. Company XYZ's bond would then be considered a fallen angel.

Why Does a Fallen Angel Matter?

A bond with a credit-rating that has declined far enough to qualify it as a fallen angel will often experience even further declines as investors learn of its downgraded status. This compounded drop in value can have serious repercussions for a company, and can eventually lead to further rate cuts, and further declines. Because changes in credit-ratings can have significant impacts on the underlying companies, it is critical to investors that the agencies making the assignments are impartial.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.