Recent Fallen Angels: A Specter of BBB Downgrades to Come?

Fears of a surge in U.S. BBB corporate bond downgrades have intensified in the high-yield market as the food giant, Kraft Heinz, and department store chain, Macy’s, were downgraded from investment grade to high yield in the past two weeks. Kraft Heinz is now the largest ever fallen angel in the developed markets, adding around $23 billion of bonds into the high-yield sector. Tom Ross, corporate credit portfolio manager, shares his thoughts on the downgrades.

Key Takeaways

  • Fears of a surge in supply into the high-yield market may be somewhat overdone. While there have been a number of BBB downgrades into high yield this year, they have not had a major impact on the broader markets.
  • Rising stars (high-yield names moving up into investment grade) are still outpacing fallen angels and positive technical factors in the U.S., such as the tie‑up between Sprint and T‑Mobile, which tightened Sprint spreads, has effectively driven extra demand for other U.S. high-yield bonds.
  • Are the recent fallen angels the start of a new trend? We believe not. While there are a handful of names to look out for in the near future, the low volume of BBB bonds that are on downgrade watch in the U.S., do not indicate a sudden significant wave of downgrades into the high-yield market.