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.
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Finance: What is Busted Convertible?14 Views
Finance a la shmoop..what is a busted convertible?
well techno growth forever biotechs swore to its customers that upon death they [Mans head enters into a glass jar]
could sever their heads freeze them and in 40 years they would have technology
to have them reborn into a really cool robot body and yeah kim kardashian model
was a huge huge hit we cannot lie.... The company stocks zoomed to a hundred
dollars a share and management needed cash to open offices in China Latin [Cash travels around the world]
America and Africa but they didn't want to suffer dilution by just selling
equity or part ownership in themselves to the street at least not at the
hundred dollar share price they really just wanted to borrow money [Cash and an IOU note appears on a table]
to fund these new offices because well they thought their stock would easily
get to $250 a share in the next few years
tons of people out there who wanted to you know live forever
you know like fame.....nevermind their bankers were nervous about how
investors would react to just a straight bond which carried 8% interest so
instead they kind of compromised by doing a convertible preferred stock [Men give handshake]
offering they sold preferred stock to the street that carried just 3% interest
but those preferred shares were convertible into common stock at a
hundred seventy five bucks a share so the owners of the preferred would keep [Stock value of biotech company rises]
clipping their three percent coupons until one day the stock hit a hundred
seventy five bucks or better well and then they could participate in the
[Man hits a baseball] upside if the stock really was a homerun but sadly as many things do in shmoop
video....Test came back from the early decapitating trials and well they were
oh so not good legions of zombies began to roam the streets and while consumers [Zombies walking along the streets]
just didn't want to go there they'd rather truly rest in peace so the stock
cratered down to $20 a share where it would sit for all eternity in what is
called a busted convertible and took us a while to get there but we got
there the convertible preferred would pay 3% a year in interest as it always [Preferred stock with 3% interest sticker]
had and a convertible stock is so far below the conversion price of $175 well,
investors assume it will never convert the investment case views
the convert solely as a preferred or kind of like a bond offering against
competitive bond interest rates so yeah that's a busted convertible although so
is this they really never should have given robot Kim K a driver's license [Robot Kim Kardashian beside an upside down, crashed car]
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What is a Fallen Angel? Fallen angels are investments that were once very valuable and are now pretty worthless. The term is used with stocks and b...