Angel Bond - Definition and Explanation
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Angel Bond Definition
An Angel Bond is an investment-grade bond issued by companies with high credit ratings.
A Little More on What is an Angel Bond
The credit ratings of angel bonds vary. They can be rated AAA, Aaa, BBB, and Baa. Angel bonds that have AAA and Aaa ratings have high ratings, while those with BBB and Baa ratings have the minimum investment-grade rating. The S&P 500 and Fitch uses AAA and BBB while Aaa and Baa are used by Moodys.
Even More of an Explanation of Angel Bonds
There are multiple factors that affect a bonds rating, such as the performance of the bond and the financial status of the company that issues it. It is possible for a bond originally issued with an investment-grade rating to be downgraded to a junk bond if it falls below the investment-grade minimum rating. These angel bonds are known as "Fallen Angels". The credit rating assigned to a bond indicates its credit quality level as well as its credit risk. Typically, independent rating services and agencies assign credit ratings to bonds to avoid biases and other issues that might arise. The financial strength of a bonds issuing company is also considered when awarding the credit rating. [ht_toggle title="Academics research on Angel Bond and Fallen Angels" id="" class="" style="" ] Fallen angelsand price pressure, Ambrose, B. W., Cai, K. N., & Helwege, J. (2011). Fallen angels and price pressure. We examine price pressure in a setting where trades occur because of regulations. Our study of fallen angel bond sales by insurance companies shows that price pressure is not significantly different from zero when information effects are absent. Our results confirm the prediction of several theoretical models that sellers will benefit from a higher price when they are able to separate themselves out to dealers as uninformed. We find that insurers do not attempt to hide their trades by selling bonds before they are downgraded, consistent with following a strategy of sunshine trading, as in Admati and Pfleiderer (1991). Defaults and returns on high-yieldbonds, Altman, E. I., & Bana, G. (2004). Defaults and returns on high-yield bonds.Journal of portfolio management,30(2), 58.Fallen angels: A separate and superior asset class, Fridson, M., & Sterling, K. (2006). Fallen angels: A separate and superior asset class.The Journal of Fixed Income,16(3), 22.Testing conflicts of interest atbondrating agencies with market anticipation: Evidence that reputation incentives dominate, Covitz, D. M., & Harrison, P. (2003). Testing conflicts of interest at bond rating agencies with market anticipation: Evidence that reputation incentives dominate. This paper presents the first comprehensive test of whether well-known conflicts of interest at bond rating agencies importantly influence their actions. This hypothesis is tested against the alternative that rating agency actions are primarily influenced by a countervailing incentive to protect their reputations as delegated monitors. These two hypotheses generate a number of testable predictions regarding the anticipation of credit-rating downgrades by the bond market, which we investigate using a new data set of about 2,000 credit rating migrations from Moody's and Standard & Poor's, and matching issuer-level bond prices. The findings strongly indicate that rating changes do not appear to be importantly influenced by rating agency conflicts of interest but, rather, suggest that rating agencies are motivated primarily by reputation-related incentives. Defaults and Returns in the High YieldBondMarket: The Year 2003 in Review and Market Outlook, Altman, E. I., & Fanjul, G. (2004). Defaults and Returns in the High Yield Bond Market: The Year 2003 in Review and Market Outlook. High yield bond defaults in 2003 declined significantly from record 2002 levels closing the year at $38.5 billion for a default rate of 4.66%. The fourth quarter s rate of 0.36% was the lowest quarterly rate since the fourth quarter of 1997. The default loss rate for 2003 also declined to just 2.76% based on a weighted average recovery rate of about 45% -- a majorimprovement from the 25% levels of the prior several years. Fourteen of the 86 defaultingcompanies had issues that were investment grade sometime prior to default. These fallenangels accounted for 33% of defaulting issues and 46.3% of the defaulted volume in 2003.The high-yield bond market returned an impressive 30.62% for the year, the third highest one-year return since 1978 (when we first began tracking returns). The return spread over ten-year US Treasuries was a record high 29.4%, bringing the historic average annual return spread to 2.22% per year. The concurrent yield spread at year-end fell to 3.74%, the lowest year-end figure since 1997 and 4.82% less than one year ago. New issues in 2003 recorded anear record level of $137.4 billion; the vast majority was used for refinancing existing loan and bond issues.Based on our mortality rate methodology and assuming different measures of credit risk ofrecent new issuance, we expect default rates to continue their decline in 2004 to between3.2% - 3.8%, with rates increasing in 2005 to above 4.0%. [/ht_toggle]