Listen to a Business English Dialogue About Fallen angel
Mia: Hi Clarence, have you heard about fallen angels in finance? I’ve heard the term, but I’m not entirely sure what it means.
Clarence: Hey Mia, yes, fallen angels are bonds that were initially issued with investment-grade ratings but have been downgraded to junk status due to deteriorating financial conditions of the issuing company. It means they are now considered riskier investments with higher default probabilities.
Mia: Oh, I see. How do fallen angels affect investors?
Clarence: Fallen angels can affect investors in various ways. They may experience price declines as a result of the downgrade, which can lead to capital losses for bondholders. However, some investors may see fallen angels as opportunities to potentially earn higher yields if the bonds recover or if they believe the downgrade was unwarranted.
Mia: That sounds complicated. How do credit rating agencies determine if a bond is a fallen angel?
Clarence: Credit rating agencies assess various factors, including the issuing company’s financial health, debt levels, cash flow, and market conditions, to determine if a bond should be downgraded. If the company’s creditworthiness deteriorates, the rating agency may lower the bond’s rating to reflect the increased risk of default.
Mia: Got it. Are there any risks associated with investing in fallen angels?
Clarence: Yes, investing in fallen angels carries risks, such as higher default probabilities and increased price volatility compared to investment-grade bonds. Additionally, fallen angels may face liquidity challenges, making it difficult for investors to buy or sell them at favorable prices.
Mia: Thanks for explaining, Clarence. It’s helpful to understand the concept of fallen angels and their implications for investors.
Clarence: You’re welcome, Mia. Fallen angels can present opportunities for investors seeking higher yields, but it’s essential to carefully assess the risks and conduct thorough due diligence before investing in them. If you have any more questions, feel free to ask!
