Fallen Angel

In the religious sense, it’s a former angel that’s been kicked out of heaven. Think: Lucifer.

In general, a fallen angel refers to something that was up very high...and is now down low.

Turning specifically to the financial market, the term most often gets used to identify a bond that used to have an investment-grade rating, but has since been downgraded to junk.

A little background. When companies or governments issue bonds, the rating agencies (Fitch, S&P, and Moody’s) look at the finances of the organization and decide how likely it is that the bonds will get paid back. They give it a rating based on the risk level. The highest rating is AAA, which indicates the lowest risk, meaning there is only the remotest chance that the organization will default on the bonds. There's a series of ratings below that. AA, A, BBB, etc. Above a certain rating (BBB- at S&P, or Baa3 at Moody's), bonds are considered "investment grade." Below that level, the bonds are considered "junk."

Periodically, the ratings agencies will reassess their ratings. If circumstances get worse, they might downgrade their rating on the bond. So a bond is issued at AAA rating. But then conditions deteriorate. Revenue and profit at the company decline. When the rating agency takes a second look, they downgrade the rating. Now it's at AA. Still investment grade. Still pretty good. Just not as good as before.

The process continues to get worse, however. After a number of years and a series of downgrades, the bonds are downgraded to CCC. Below investment grade. Junk. The bonds are now considered a fallen angel. Once investment grade, now junk. Once really high, now really low…so sad. It was once loved. As were we all. We were angels. We floated waaaaaay up above the clouds…above the 100 times earnings high-multiple-o-sphere. But then we stumbled. We failed. The market turned. The environment turned. Competition came. And we did not adjust. So we fell. As we missed our earnings numbers. Again. And again. And again.

A fallen angel is a company that used to be loved by everyone on Wall Street. It was the next Google, the next Facebook, the next Amazon...heading oh so high to the sky, with no ceiling in sight. But then, well…the ceiling actually came into sight. And got hit. And the company missed a quarter, and the multiple of earnings the stock traded at got hit, and the company fell again, and again. And each time, it flew lower to the ground from the lofty, lovely views of the 100x club...to now the single-digit world of boring companies.

No banker love. Just a bunch of vultures picking at our wings. Maybe someday we’ll figure things out and, uh…get back up there where we belong...where the eagles fly on a mountain high.