“Fallen angels,” below investment-grade corporate bonds that were rated investment grade at the time of their issuance, have thus far outperformed the broad high-yield corporate bond marketplace in 2012, signaling that the value proposition inherent in these issuances was likely at work once again this year, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
Year-to-date through December 12, 2012, the BofA Merrill Lynch U.S. Fallen Angel High Yield Index (H0FA) gained 19.83 percent, versus 13.78 percent for BofA Merrill Lynch U.S. High Yield Master II Index (H0A0). If this trend continues, this would mark the fourth, out of the past five years, of outperformance by fallen angels versus the overall high-yield space.
“Yes, it was a strong year for virtually every part of the high-yield universe, but fallen angels are one category that performed particularly well,” says Rodilosso. While the positive performance of the past year may leave less scope for price appreciation in 2013, fallen angels still have a yield-to-worst* just inside that of the broader high-yield market. Angels have a longer duration* on average, but also a higher credit rating – nearly 76% of the BofA Merrill Lynch U.S. Fallen Angel High Yield Index were rated BB or above versus 41.12% of the BofA Merrill Lynch U.S. High Yield Master II Index, as of December 12, 2012.”
“With credit metrics having leveled off mid-year before deteriorating slightly in the second half of 2012, and with Europe likely providing additional downgrades as well, it seems likely in my view that the fallen angel universe will grow in 2013,” said Rodilosso. “There are actually fewer fallen angel bonds at the end of 2012 than there were at the beginning, though price appreciation has led to a higher overall market capitalization for the sector.”“Several major names ascended out of the fallen angel category this year even as others saw their debt ratings lowered to fallen-angel status. Among the major departures from the fallen angels rolls this year were Ford, Pioneer Natural Resources, El Paso Pipeline and Sunoco. As many companies left, several interesting names joined the ranks of fallen angels in 2012,” continued Rodilosso, “including Arcelor Mittal, Rockies Express, Eksportfinans, Elepor, and subordinated debt issued by RBS, Lloyds and Credit Agricole.” “Interestingly,” added Rodilosso, “the BofA Merrill Lynch U.S. Fallen Angel High Yield Index, which underlies our fallen angel-focused ETF, included 89 percent U.S.-domiciled issuers at the beginning of 2012. Currently that percentage has dropped to 72 percent, making the Market Vectors Fallen Angel High Yield Bond ETF (NYSE ARCA: ANGL) a potentially compelling way to add exposure to European-based fallen angels that have been issued in the U.S.”
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