In the wake of the coronavirus outbreak and the resultant lockdowns in various parts of the world, several corporations have been facing severe cash crunch. Consequently, an increasing number of borrowers are slipping into the category of the “fallen angels.” Investors should note that a fallen angel is a bond which has been reduced to junk status from an investment-grade rating. The downgrade is caused by deterioration in the financial health of the issuer.
Per S&P Global (NYSE:SPGI) Ratings, the debt markets witnessed a rise in fallen angels ('BBB' rated companies that have been downgraded to a speculative grade) during the first quarter. About $237 billion in rated long-term debt was downgraded to speculative grade from 'BBB' ratings although roughly 75% of this was largely focused on three major issuers: Ford Motor Co. F, Occidental Petroleum Corp. OXY and The Kraft Heinz (NASDAQ:KHC) Co KHC.
S&P Global Ratings predicts that the sudden halt in the global economy amid the outbreak and the recent drop in oil prices will lead to about $640 billion of corporate nonfinancial 'BBB' category rated long-term debt to slide to “fallen angel” status in the United States and EMEA.
Fed to the Rescue?
The Fed’s latest easing policy, announced on Apr 9, included the investment of “up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.” In the high-yield category, the Fed won’t buy bonds with credit rating no lower than BB-.
This latest easing followed the Fed’s zero rate policy in the United States and launch of an infinite QE as well as the announcement of buying highly-rated corporate debt. Plus, on Mar 27, President Trump signed a $2-trillion stimulus package. Fed’s as well as government’s move should favor fallen angels in a big way (read: Fed's Historic Move Spurs Rally in Junk Bonds: 6 ETF Picks).
Below we highlight the pureplay bond ETF and stocks of those issuers that could help you tap the new-found respite in fallen angels. These stocks and the pure-play bond ETF have beaten the S&P 500-based ETF SPY (NYSE:SPY) (gained 7.1%) in the past five days (as of Apr 14).
ETF Pick
VanEck Vectors Fallen Angel High Yield Bond ETF ANGL — Up 8.5% in the past week (as of Apr 14)
The 237-security fund’s seven out of top-10 holdings have BB+ ratings. The fund’s 30-Day SEC yields 7.01% annually. It has an asset size of $1.6 billion.
Stock Picks
Delta Air Lines Inc (NYSE:DAL). DAL — Up 10%
Airlines, the hardest-hit by the pandemic, were granted around a $50-billion bailout. These operators halted buybacks and dividend payouts as well as promised better cash management.
The Kraft Heinz Company KHC — Up 9.9%
The Zacks Rank #3 consumer packaged food and beverage company in North America comes from a favorable Zacks industry (top 30%). Food companies have been a winner in the present pandemic crisis as these are among the few that are operating seamlessly (read: Any Bright Spot in Q1 Earnings? Sector ETFs & Stocks to Buy).
Western Midstream WES — Up 45.8%
The Zacks Rank #3 company has been formed to own, operate, acquire and develop midstream energy assets. The stock hails from a favorable Zacks industry (placed at the top 36% of total 250+ industries in the Zacks universe). It yields as much as 43.50% annually.
Ford Motor Company (NYSE:F) F — Up 16.8%
The automaker has a Zacks Rank #3. Apart from vehicles, the company provides financial services through Ford Motor Credit Company LLC (“Ford Credit”).
PulteGroup Inc (NYSE:PHM). PHM — Up 18.3%
The Zacks Rank #3 homebuilder should benefit from low rates. The company has a VGM score of A.
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Ford Motor Company (F): Free Stock Analysis Report
PulteGroup, Inc. (PHM): Free Stock Analysis Report
Delta Air Lines, Inc. (DAL): Free Stock Analysis Report
Occidental Petroleum Corporation (NYSE:OXY): Free Stock Analysis Report
Western Gas Equity Partners, LP (WES): Free Stock Analysis Report
The Kraft Heinz Company (KHC): Free Stock Analysis Report
VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL): ETF Research Reports
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