Crossovers can include high-yield bonds on the path to being upgraded to investment grade (known as rising stars) and their opposite, investment-grade bonds that are at risk of being downgraded to high yield (fallen angels).
Although the COVID-19 pandemic initially triggered downgrades (fallen angels) at an unprecedented pace, much of the impact was, not surprisingly, centered on sectors affected by travel restrictions and social distancing. During the first seven months of 2020, the S&P Global Ratings credit-rating agency downgraded 40 issuers of a collective $340 billion in debt to junk status globally, including big companies such as Occidental Petroleum, Kraft Heinz, Carnival, Delta Air Lines, Renault, and Ford.
However, the major price dislocation anticipated by the markets pre-pandemic given the decade-long growth of BBB debt didn’t materialize. The liquidity infusion from swift action by governments and central banks globally and corporations’ ability to raise capital via the bond and equity markets limited the financial impact from business closures.
“In this environment, we were able to add significant value with crossovers,” said Min Fang, a U.S.-based Vanguard credit analyst. “We held on to some fallen angels that were fundamentally solid, which limited the potential loss from fire sales and resulted in outsized returns when those companies began to recover. We also provided liquidity to some corporations that were expected to recover over time—including airlines, cruise lines, and hotels—by purchasing new debt issued during the pandemic at very attractive levels.”