Fran Rodilosso, a high-yield corporate bond portfolio manager at US-based Market Vectors ETFs, recently commented on what he sees as the major themes and trends shaping the ‘fallen angels’ segment of the US high-yield corporate bond space.
“We have already seen some high-profile fallen angels ‘re-ascend’ this year, known as ‘rising stars,’ including $8 billion in Ford Motor bonds,” said Fran Rodilosso of Market Vectors ETFs.
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% 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 $8 billion in Ford Motor bonds and $700 million in Pioneer Natural Resources bonds,” said Rodilosso.
A 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,” added Rodilosso.
“While I believe that we could see growth in the BofA Merrill Lynch US Fallen Angel High Yield Index, which underlies our Market Vectors Fallen Angel High Yield Bond ETF, over the next six to twelve months,” continued 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 $73 billion of investment-grade bonds with a rating in the lowest investment-grade category that are on negative outlook, i.e. fallen angel candidates,” continued 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% historical average, though I believe they could tick up to the 3.0-3.5% range by the end of the year.”
Rodilosso is the manager of three NYSE-listed high-yield corporate bond ETFs, the Market Vectors Fallen Angel High Yield Bond ETF (ANGL), the Market Vectors International High Yield Bond ETF (IHY) and the Market Vectors Emerging Markets High Yield Bond ETF (HYEM).
For UK-based investors looking to gain exposure to US high-yield corporate bonds, there are a couple of London-listed ETFs to consider:
Pimco Short-Term High Yield Corporate Bond Index Source ETF (STHY)
The Pimco Short-Term High Yield Corporate Bond Index Source ETF aims to replicate the performance of the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index by investing in a range of securities broadly similar to the constituents of the index. The BofA Merrill Lynch 0-5 Year US High Yield Constrained Index tracks the performance of short-term US dollar-denominated sub-investment-grade corporate debt issued in the US domestic market with less than five years remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $100 million, issued publicly. Allocations to an individual issuer will not exceed 2%. London (LSE) listed, TER 0.55%.
iShares Markit iBoxx $ High Yield Capped Bond ETF (SHYU)
The iShares Markit iBoxx $ High Yield Capped Bond ETF tracks the Markit iBoxx USD Liquid High Yield Capped Index. This index consists of the most liquid US dollar-denominated corporate bonds with a sub-investment-grade rating, while maintaining a focus on UCITs eligibility. The maximum original time to maturity is 15 years and the minimum time to maturity is three and a half years for new bonds to be included and three years for bonds that already exist in the index. For diversification purposes the weight of each issuer in the index is capped at 3%. London (LSE) listed, TER 0.50%.