The Life Expectancy of Fallen Angels

Abstract

In this study, we develop analytic derivations for the projected mean and median times to default for high-yield bonds that have been previously downgraded from investment-grade ratings. These predictive measures are calibrated for both the respective times already spent in the group of high credit grades and the inherent dependency between the observed times in the investment and the speculative classes. We also document an inverse historical relation between the time spent in the group of investment-grade ratings and the noninvestment class. Furthermore, we calculate both the mean and the median times to default for numerous junk bonds in their diverse life cycles. Finally, we ide.tify the most influential accounting and market ratios that can explain the life expectancies of fallen angels. The framework presented hereafter aims to benefit high-yield debt investors.