Angel Bond

What is Angel Bond?

Angel Bond, opposite of 'fallen angels', is slang for an investment-grade bond with a high enough credit rating that banks can legally invest in them.

Understanding Angel Bond

An angel bond pays a lower interest rate because of the issuing company's high credit rating which implies a lower risk investment. Angel bonds are the opposite of fallen angels, which are bonds that were originally investment-grade but have been downgraded to a "junk" rating, and are therefore much more risky.

Angel bonds receive investment-grade credit ratings that can range from a high of 'AAA' by Standard & Poor's (S&P) and Fitch and 'Aaa' by Moody’s Investors Service to the minimum investment-grade ratings issued by each service of 'BBB' by S&P and Fitch, and 'Baa' by Moody's. If the company's ability to pay back the bond's principal is reduced, the bond rating may fall below investment-grade minimums and become a fallen angel.

Angel bonds are most commonly used as a point of reference when describing fallen angels. The latter have “fallen” by seeing their credit ratings descend through the various levels of investment-grade ratings into the below-investment grade area, also referred to as high yield or junk ratings categories. Fallen angels differ from other high yield bonds that were originally rated below investment grade.

A bond rating is a grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's Investors Service and Fitch Ratings Inc. provide these evaluations of a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion.

Credit ratings generally reflect a relative ranking of credit risk. For example, an obligor or a bond issuer for a security with a high credit rating is assessed by the credit rating agency to have a lower likelihood of default than an issuer for a debt security with a lower credit rating.

Examples of Angel Bonds to Fallen Angels

Fallen angel bonds tend to be larger and more well-established companies that have experienced financial difficulties such as declining sales, increased competition or rising debt that has negatively impacted their ability to repay debt obligations.

Retailer JCPenney (JCP) is an example of a once strong company that has become a fallen angel. JCPenney was coming off record holiday sales and maintained an investment grade A rating from S&P in 1997 when it became the only retailer out of a group of angel bond issuers to sell 100-year bonds. But plunging sales caused by missteps in pricing and marketing as well as failed attempts to attract more affluent shoppers caused the company’s bonds to lose their investment grade rating over the next decade and fall deep into junk bond territory. {Note: JCP filed for chapter 11 bankruptcy on May 15, 2020}.

Other angel bonds that have been downgraded to below investment grade ratings include Ford (F) and Gap (GPS).