Fallen angels more likely to default or return to investment grade, Moody's says

New York, Aug. 1 - Fallen angels that are lowered to junk or more likely to default or suffer further downgrade than issuers that have always had speculative-grade ratings, according to Moody's Investors Service.

But if they don't default they are more likely to return to investment grade than junk-rated companies, the rating agency added.

The findings are from a new study by Moody's.

Since 1982, there have been 1,035 fallen angels, Moody's said.

So far 136 have defaulted while 285 have returned to investment grade.

"Data show that fallen angels that survive the distress that prompted their downgrades often possess the franchise strength and the business incentives needed to restore their profitability and to repair their balance sheet," said Moody's analyst Christopher Mann, who carried out the study.

"A fallen angel's relative likelihood of defaulting or returning to investment grade is strongly correlated with the ratings assigned on the day it is first downgraded from investment grade to speculative grade," says Mann. "Issuers that fall to lower ratings or those that fall further tend to have higher default rates." An initial downgrade to lower than the near investment-grade Ba category is a signal that a credit is more likely to default and less likely to ever recapture investment grade.

On average fallen angels are lowered two notches when they become junk rated, fall another notch during the following two years and rise a fraction of a notch over the three years after that.

But Moody's noted that individual companies show widely varying performance.

Mann noted that the findings are consistent with previous Moody's research showing that recently downgraded firms display "ratings momentum" - they are more vulnerable to further downgrades and default than comparably rated firms that have been at the same rating level for a while.

Moody's noted that fallen angels make up a growing portion of the junk bond market with issuers currently in this category including Calpine Corp., Fiat SpA, Vivendi, Xerox Corp. and Lucent Technologies Inc.

In 2002, $201 billion in new speculative debt came from fallen angels while only $61 billion came from new issuance.

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