Fallen Angel
A bond that was originally rated investment grade but has since been downgraded to high-yield (junk) status due to deteriorating credit quality.
What is Fallen Angel?
A fallen angel is a bond (or the issuing company) that was originally rated investment grade (BBB−/Baa3 or higher) at issuance but has subsequently been downgraded to below investment grade—known as high-yield or junk status—due to deteriorating financial conditions. Fallen angels differ from bonds that were never investment grade (called 'rising stars' do not apply here; 'original issue high yield' is the opposite category). Fallen angel downgrades can trigger forced selling by institutional investors required to hold only investment-grade securities, often creating temporary price dislocations. Distressed debt investors and specialized fallen angel ETFs seek to capitalize on these price overshoot opportunities.
Example
During the COVID-19 pandemic in 2020, Ford Motor Company's bonds were downgraded from BBB− to BB+ by S&P, making Ford one of the largest fallen angels in history with approximately $36 billion of debt moving from investment grade to high yield. This triggered forced selling by insurance companies and pension funds constrained to investment-grade holdings, pushing Ford bond prices sharply lower before they recovered as the company's liquidity situation stabilized.