European ETF provider Tabula Investment Management has launched a Paris-aligned Global High Yield Fallen Angels Climate UCITS ETF.
The Article 9 ETF has $50m in assets seeded by a large Nordic institution. It has been designed to maximise potential returns from fallen angels bonds – namely bonds that have been downgraded from investment grade – while aligning with the objectives of the Paris Agreement.
Tabula CEO Michael John Lyttle explained many ‘fallen angels’ enter the high yield universe with a BB rating and don’t slip below that.
“When comparing fallen angels to the broader high yield universe, they offer higher credit quality with the potential to return to investment grade over time,” he said.
“S&P’s long-term average global default rate is 0.59% for BB, compared to 25.7% for CCC and below, so the default rate for fallen angel exposure is likely to be significantly lower than for broad high yield exposure.”
Tabula CIO Jason Smith added, “In addition to their lower default risk, many fallen angels are also well positioned for upgrades. Fallen angels tend to be large, well-established names. Their business models and financing strategies are built around investment grade borrowing rates, so their management has a strong incentive to address the issues that triggered the downgrade. Obviously, there is good potential for price appreciation if they rebound.”
Recent examples of fallen angel bonds include those offered by cyclical names Yum! Brands and Bath & Body Works, which Smith said could be in a stronger position as the rate hiking cycle comes to an end.
Stefan Garcia, chief commercial officer at Tabula, commented: “This is Tabula’s third Article 9, Paris-aligned bond ETF launch to be backed by a leading Nordic institution.
“As we have developed partnerships with investors striving for better ESG outcomes, Tabula’s assets in SFDR Article 8 and 9 funds have grown to 80% of ETF AUM.”