FINC 322 - Chapter 7 Fallen Angels

FINC 322 - Chapter 7 Fallen Angels - market for...

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Fallen Angels Fallen angels  are bonds that were issued with an investment-grade  rating, but, because of the deteriorating finances of the company, the  bonds were downgraded to a BB rating or less. Many of these companies  are near bankruptcy or in default. The key to profiting from fallen angels is  to determine the amount that could be recovered in a liquidation or  reorganization. Prior to 1977, almost all junk bonds were fallen angels, because bonds   were not issued with less than an investment-grade rating . Original Issuers of Junk Bonds—Story Bonds Drexel Burnham Lambert pioneered the marketing of  original-issue junk bonds (Michael Milken) . As junk bond traders, Drexel Burnham Lambert  knew there was a market for fallen angels, so why wouldn't there be a 
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Unformatted text preview: market for original-issue junk. Although the issuers of original junk bonds must pay a higher yield than on investment-grade bonds, the yield was still lower than what many businesses had to pay for bank loans, if they could get a bank loan at all. Hence, many of these businesses, sometimes referred to as venture-capital situations , growth market or emerging market companies , were willing to issue original-issue junk bonds. In the hope of lowering the yield, these bonds were often sold with optimistic financial projections and a description of how it would be achieved—hence, the nickname, story bonds ....
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This note was uploaded on 12/13/2011 for the course FINC 322 taught by Professor Nazar during the Fall '11 term at Ferris State.

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FINC 322 - Chapter 7 Fallen Angels - market for...

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