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Moody's: No surge in "fallen angels" during financial crisis.

Summary: The pace at which corporate bond issuers became "fallen angels"

The pace at which corporate bond issuers became "fallen angels" -- lost their investment-grade ratingsaACAodid not surge as did corporate default rates during the 2008-09 financial crisis, says Moody's Investors Service in a new report, "Why Fallen Angels Fall."

Looking at the rate at which nonfinancial corporate issuers became fallen angels in the period 1999 through 2013, Moody's finds a spike in the likelihood of becoming a fallen angel during the 2001-03 recession, but no corresponding elevation during 2008-09 great recession.

"The relative scarcity of fallen angels during the financial crisis was likely attributable to a relatively healthy nonfinancial corporate sector that did not cause the financial crisis and the Federal Reserve's post-financial crisis aggressive monetary policies that stimulated risk appetite for corporate debt and provided liquidity to corporate credit markets," says Kenneth Emery, a Moody's Senior Vice President.

Of the 477 firms Moody's downgraded to speculative grade from investment grade during the 1999-2013 period globally, 178, or 38%, experienced this action during 2001-03. By contrast, there were 34 fallen angel rating actions in 2008 and 37 in 2009.

For the entire period covered by the report, a majority of fallen angel downgrades occurred as a result of company-specific factors (42% of fallen angels) or industry stress (30% of fallen angels).

Fallen angel downgrades that resulted from leveraged acquisitions or more aggressive financial policies were more likely to occur during periods of benign credit conditions, says Moody's.

While the median downgrade for fallen angels that were due to leveraged acquisitions was five rating notches, the median downgrade for fallen angels due to all other reasons was only 1-2 rating notches.

In terms of the paths fallen angels follow after their descent into speculative grade, of the 477 fallen angels in the study sample, 187

(39%) have remained speculative grade, 135 (29%) have returned to investment grade (i.e., become rising stars), 69 (15%) have defaulted and

86 (18%) have had their ratings withdrawn.

Moody's notes that the lower the rating assigned at the date a firm became a fallen angel, the more likely that firm was to later default.

However, the default rates for fallen angels were similar to default rates for a control sample of similarly rated non-fallen angels.

Fallen angels were modestly more likely to be upgraded back to investment grade (i.e., become a rising star) than were a control group of similarly rated non-fallen angels.

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Publication:EMBIN (Emerging Markets Business Information News)
Date:Feb 5, 2014
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