Could Too Many Falling Angels Be Demons for HY?
May 21, 2009
While they don’t quite live up to the dazzling cleverness of symbologist Robert Langdon in The Da Vinci Code and its Angels and Demons sequel—and really, who could?—a couple of UBS analysts, still very bright in their own right, have taken a look at angels of a different sort—high-grade companies falling into subinvestment-grade territory.
Investors have voiced concerns that all the rating agency downgrades of late might lead to an oversupply of high yield issuers. So, the analysts at UBS took a look to see if that could be the case.
They analyzed outstanding high-grade debt that is either on negative watch or has a negative outlook, noting that for simplicity they used data from Moody’s Investors Service, but would have come up with similar conclusions using info from Standard & Poor’s.
What they found was, at first glace, the growing supply of fallen angels just might make for a … er … devil of a problem. They calculated that Moody’s has placed roughly $89 billion in index-eligible high-grade debt on watch negative, and more than $650 billion has a negative outlook. These amounts represent about 17% and 122% of the current size of the index-eligible high yield market, respectively.
However, the analysts note, there are several mitigating factors to consider, the most important one being that much of this debt is nowhere near the high yield space—60% of the bonds are rated A3 or higher and 99% are rated Baa1 or higher.
And if that weren’t enough to cleanse an investor’s worried soul, much of this debt is not in deeply cyclical industries. So ratings direction is not highly dependent on the challenging fundamental backdrop. Though there are select sectors that are fairly large and could be subject to exogenous risks, the risks are rapidly lessoning. For example, the federal government recently notified several large insurance companies that they are eligible for TARP funds, which will bolster their respective capital profiles and ratings prospects.
So, according to the analysts, even though ratings movement remains one directional—that direction being down, in case you’ve been having a rather long nap—they do not expect falling angels to create an unmanageable supply in high yield.
Now, I suppose I would sound like a snobby beatch if I made some smart remark about the supply of works by or adapted from Dan Brown being a different story. Especially since I did actually watch The Da Vinci Code and must admit I learned a great deal, most importantly: Never update your Netflix queue after three margaritas.
Oops. Did I say that? Beatch.
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