easy · Corporate Credit Analysis
A 'Fallen Angel' trade is based on the observation that bonds often over-correct (price falls too far) immediately after being downgraded from BBB- to BB+.
What is the main driver of this over-correction?
- Technical selling pressure from institutional investors mandated to hold only investment-grade debt.
- The loss of the company's ability to sell products to its customers.
- The company being required to redeem all its bonds at par upon downgrade.
- A sudden increase in the company's interest expense.
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