Fallen Angels vs. Rising Stars: How Bond Ratings Move

In common fixed-income usage, a fallen angel is debt that once had an investment-grade rating and was later downgraded below that category. A rising star is debt that moves from speculative grade into investment grade. These labels describe a rating transition, not a separate kind of bond contract.

On S&P Global Ratings’ long-term scale, BBB− is the lowest investment-grade notch and BB+ is the highest speculative-grade notch. Moody’s uses different symbols; Baa ratings are medium grade, while Ba ratings are speculative. A change from BBB− to BB+ is one familiar example of a fallen-angel move under the S&P scale, while BB+ to BBB− illustrates a rising-star move. The S&P rating-scale overview explains its categories, and Moody’s scale uses its own terms.

The cutoff is not a universal switch embedded in every bond. Different rating agencies can disagree, and an issuer-level rating can differ from the rating on a specific debt issue. Index providers and investment funds can also apply their own rules about which agencies, ratings, and securities count.

A credit rating is an agency’s opinion about relative credit risk. It is not a promise that an issuer will pay, a guarantee against default, or a forecast of a bond’s market price. Agencies review information about an issuer and can change their view as business, financial, or economic conditions evolve. S&P describes its ratings as opinions and one input among several that investors may consider.

A rating transition can apply to an entire issuer or to one specific bond. S&P distinguishes issuer ratings, which assess an organization’s general creditworthiness, from issue ratings, which focus on an individual obligation and its features, such as seniority or collateral. Two bonds from the same company can therefore carry different ratings. Check whether a notice refers to the company, a particular bond, or both.

An outlook or watch notice also is not the same as a completed downgrade or upgrade. It signals a potential direction or review under an agency’s process. The rating itself changes only when the agency announces a rating action. Read the announcement and identify the effective rating and the debt it covers.

A rating can change when the agency’s assessment of repayment risk changes. Relevant developments may include weaker cash flow, higher debt, reduced access to refinancing, a change in business prospects, or improved financial strength. Broader industry and economic conditions can matter too. The drivers differ by issuer and sector; a single ratio or headline rarely explains every rating action.

A downgrade does not always mean that the borrower is close to missing a payment. For example, a company can still pay interest on time after moving below investment grade, while the agency judges its ability to withstand future stress to have weakened. Conversely, an upgrade can reflect better credit conditions without eliminating financial or market risk.

The rating concerns creditworthiness, but the investor’s result also depends on the bond’s price, coupon, maturity, seniority, call provisions, and liquidity. The SEC’s corporate-bond bulletin explains that ratings are reviewed and may be revised as conditions or expectations change.

A lower rating may cause investors to demand more yield for bearing credit risk. If the market’s required yield rises while the bond’s promised cash flows stay the same, its price generally falls. But the price reaction is not determined by the letter change alone. Treasury yields, expected default losses, recovery prospects, liquidity, and investor demand can move at the same time.

Markets can also anticipate a rating action. If investors already expect weaker credit, a bond’s price and spread may adjust before the downgrade is announced. If the action is less severe than expected, the price response may be modest or even move in the other direction. A rating change is information; it is not a fixed price formula.

The reverse can happen around an upgrade: a lower perceived credit risk may support a higher price or narrower spread, all else equal. Yet a bond may not rally if the improvement was already priced in, or if benchmark yields rise for unrelated reasons. For how corporate yields can move differently from Treasury yields, see why a corporate bond yield can rise as Treasury yields fall.

No. A downgrade from investment grade to speculative grade is not itself a missed payment or bankruptcy. It means the rating agency’s opinion has crossed a category boundary. Default is a separate event, defined by the terms of the debt and the relevant rating agency’s criteria.

The SEC notes that high-yield bonds generally carry greater default risk than investment-grade bonds. That is a statement about relative risk, not a claim that every high-yield issuer will default or that every investment-grade issuer will pay without difficulty. Credit ratings are also only one source of information; bondholders can lose money because of price changes, liquidity problems, restructuring, or default.

A rating category should therefore be read alongside the issuer’s ability to generate cash, its debt maturities, liquidity, collateral and priority, and the specific bond documents. A bond’s coupon or yield may look attractive after a downgrade because buyers require compensation for added risks; the higher number alone does not tell you whether that compensation is sufficient.

Sometimes a fund or mandate restricts holdings to investment-grade debt, and a downgrade may cause the security to fall outside its stated policy. The prospectus, investment guidelines, or index methodology determine what happens next. Some rules may allow a holding period or use ratings from multiple agencies; other products may apply different tests. Do not assume that every bond fund must sell a bond immediately after one agency acts.

An index can have its own fallen-angel definition. For example, S&P Dow Jones Indices’ iBoxx USD Corporates Fallen Angels index describes eligible dollar-denominated bonds and sets rating, size, and maturity criteria. A bond can meet the general market meaning of “fallen angel” without qualifying for that particular index.

If a fund does sell, the timing and market impact depend on its rules, the bond’s liquidity, other investors’ expectations, and the size of the trade. A possible wave of selling is not guaranteed, and an index label does not by itself predict a security’s future return. For a fund, read its current prospectus and holdings rather than relying only on its name.

A rising star crosses upward from speculative grade into investment grade under the relevant rating scale or investment rule. An improved rating may broaden the set of investors or indexes that can consider a bond, but inclusion depends on each mandate and index methodology. Some investors may anticipate an upgrade before it occurs; others may wait for confirmation.

The transition does not erase past risks or guarantee a price increase. A bond’s price reflects expectations, benchmark rates, remaining maturity, coupon, liquidity, and the issuer’s financial condition. An upgrade is one signal to reassess the credit story, not proof that the bond is now risk-free or that it will outperform.

S&P Global Ratings tracks rating movements in its credit reports and defines rising stars as issuers upgraded into investment grade from speculative grade. Its 2024 data companion also illustrates that an agency’s statistical definition can specify which issuers and outstanding debt count.

First identify the exact security and rating action. Check the agency, prior and new rating, whether it is an issuer or issue rating, the effective date, and any outlook or watch status. If multiple agencies rate the debt, compare their current views rather than treating one scale as the whole market’s verdict.

Next review the credit facts and contract. Consider cash flow, debt due dates, liquidity, collateral and seniority, covenants, call terms, and the bond’s current price and yield. For a fund, check the prospectus, rating policy, benchmark, holdings, fees, and whether a downgrade changes the permitted portfolio. For a particular index, read its current methodology; index eligibility is not identical across providers.

Finally distinguish credit risk from other return drivers. A bond can be downgraded while benchmark yields fall, or upgraded while benchmark yields rise. The market price responds to the combined information, not to the label alone. This guide explains common U.S. corporate-bond rating terminology and is not a live rating report or a buy-or-sell recommendation.