Credit Braces for Fallen Angels as $100 Billion Trades Like Junk

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(Bloomberg) — Oracle Corp. and Stellantis NV are among a group of high-grade companies with debt that has recently traded close to junk levels, putting the bond market on watch for a new era of fallen angels.

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About $100 billion bonds in US dollar and euro investment-grade indexes are trading at wider spreads than the double-B — or junk — curve, based on data compiled by Bloomberg. That indicates a large amount of potential fallen angels — market parlance for investment grade companies cut to junk status.

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An ICE BofA Index of US companies that have already crossed that threshold is at its highest level since the start of 2024, following Fitch Ratings’ downgrade of Paramount Skydance Corp. earlier this year.

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The cohort is growing as companies grapple with rising financing costs, the impact of war in the Middle East, and the rapid accumulation of debt to fund artificial intelligence ambitions. For Oracle, a huge spending spree on data centers has made it the credit market’s poster child for AI risk. Stellantis, meanwhile, has been under pressure from Chinese competition, turning the maker of Jeep sport utility vehicles and Ram trucks into Europe’s worst-performing stock this year.

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Representatives for Oracle and Stellantis didn’t respond to requests for comment.

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“We’re entering late credit cycle dynamics,” said Paul Benson, head of systematic fixed income at Insight Investment, citing softness in recent jobs data, a consumer-spending slowdown and higher financing costs.

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There are also a lot of new risks related to AI, including for companies “seen as incredibly safe, solidly in the IG space, that now the future may be a little bit less clear,” he said. Benson helps oversee a rules-based fallen angel fund, which can automatically buy bonds that are cut to junk.

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Previous waves of such downgrades have occurred during times of market turmoil, like after Russia’s invasion of Ukraine in 2022, and the coronavirus pandemic in 2020.

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Losing high-grade status is arguably the most consequential credit rating change for any company. Suddenly, funds that are only allowed to invest in investment-grade debt find themselves forced to sell. And because the high-yield market is significantly smaller, there are typically far fewer buyers willing to scoop up the bonds. Anything below S&P Global Ratings’ BBB- or the Moody’s Ratings equivalent, Baa3, is classified as junk.

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Historic Downgrade Wave

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In benign markets, this type of rating change mostly happens to individual companies that have fallen on hard times, left behind by competition or technological obsolescence. In times of turmoil, fallen angel downgrades can grip entire sectors.

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The coronavirus pandemic and the effective shutdown of large parts of the global economy triggered the biggest downgrade wave in history, swelling the ranks of ICE BofA’s fallen angels indexes. A few years later, when war in Ukraine triggered runaway inflation and rapid central bank interest rate hikes, Europe’s real estate sector saw a number of downgrades to junk or near-misses as higher debt costs put the industry’s entire business model under threat.