What is an angel bond?

The opposite of ‘fallen angels’, angel bonds are a colloquial term for investment-grade bonds.

Bonds are given categories based on how safe or risky they are with respect to default risk. The higher the risk of default of an issuer, the lower the bond’s rating is, and the higher returns you get on that debt as an investor.

In this article, we’re going to explore what an angel bond is, how credit agencies categorise these bonds, and which sort of investors should invest in junk bonds – if at all.

Understanding angel bonds

Angel bonds are another term for investment grade bonds, which is a category assigned to these securities by credit ratings agencies (CRAs) like Standard & Poor’s (S&P), Moody’s Investor Service, and Fitch Ratings.

These bonds represent debt issued by corporations or governments, with the issuer promising to repay the principal amount borrowed with interest.

The interest payments and the time period of the bond are pre-determined, which means that the income you get from the debt is fixed over that time period – which is why it gets called fixed income.

What are investment-grade bonds?

Credit ratings companies assign the category ‘investment grade’ to bonds that represent high creditworthiness. These issuers have a past history of successful and timely repayments of their debt, and fulfil certain financial benchmarks for the rating.

Different credit agencies assign different sorts of ratings. Here’s a brief breakdown:

Standard & Poor’s (S&P)

• AAA: Extremely strong capacity to meet financial commitments.
• AA: Very strong capacity to meet financial commitments.
• A: Strong capacity to meet financial commitments.
• BBB: Adequate capacity to meet financial commitments.
• BB: Less vulnerable than ‘B’ ratings, but nonetheless subject to increased credit risk.
• B: Vulnerable to adverse economic conditions.
• CCC: Currently vulnerable to non-payment, but recovering.
• CC: Very high default risk.
• C: Currently in default.
• D: In default, payment arrangements are uncertain.

Fitch Ratings

Fitch uses a system similar to that of S&P, but uses C, RD, and D in the end, RD being the Restricted Default category. This is a category where an issuer has defaulted on their payments but has not filed bankruptcy or liquidation documents yet.

Moody’s Investor Service

Moody’s also uses a similar system with different notations. Instead of AAA, Moody’s uses Aaa; instead of AA, Aa; and so on.

Characteristics of angel bonds

The primary appeal of angel bonds lies in their low default risk, which means that there’s a high chance that your capital will come back to you with interest in a timely manner.

Here’s a closer look into the characteristics of angel bonds:

• Reduced default risk: Angel bonds are issued by entities that are considered to be financially sound and likely to meet their debt obligations. This significantly lowers your odds of losing your principal investment.
• Steady income: Angel bonds, like other bonds, provide regular interest payments at predetermined intervals, offering a reliable source of income. This predictability is especially valuable for individuals planning for retirement or those dependent on a consistent income stream.
• Portfolio diversification: Angel bonds can act as a stabilising force within a diversified investment portfolio. Since they’re not volatile and have fixed returns, they can add more value to your portfolio without adding much risk.
• Regulatory compliance: Certain institutions, like banks and insurance companies, may have regulations restricting them from investing in high-risk bonds. Angel bonds, with their investment-grade status, often meet these regulatory requirements.

While all these seem like attractive qualities to have in an investment, angel bonds do have some cons:

• Lower interest rates: The safety of angel bonds make them less risky, which is why they offer a lower rate of interest compared to other, riskier bonds. As the risk increases, investors demand more returns for their capital. A longer-term horizon also means a higher potential return, especially with debt.
• Interest rate sensitivity: Since bonds also have a secondary market where they’re traded after being issued, their market prices can fluctuate with interest rates. When interest rates rise, for instance, the value of existing angel bonds with lower fixed interest rates tends to decline and vice versa.

Frequently Asked Questions