medium · Debt Capital Markets credit-ratings-risk
Why does a 'fallen angel' typically experience a sharp spread widening upon being downgraded to Ba1/BB+?
- The company's probability of default has increased exponentially in a single day.
- High-yield investors demand a higher liquidity premium for any bond with 10 years to maturity.
- The issuer is required to pay a higher coupon immediately due to a rating trigger.
- Forced selling by mandate-constrained investors who can only hold investment-grade debt.
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