Fallen Angels Turn Rising Stars as $55 Billion Seen Exiting Junk

(Bloomberg) -- In Europe’s battered corporate bond market, what goes down must come back up.

That’s the theory analysts at Bank of America Merrill Lynch are applying to about 50 billion euros ($54.8 billion) of junk bonds in Europe poised for upgrade to investment-grade ratings this year as the continent recovers from a sovereign debt crisis and collapse in global commodity prices. Anglo American Plc, Telecom Italia SpA and Gazprom PJSC, with debt accounting for almost a tenth of the euro high-yield index, are on the cusp of a promotion, they said.

“In a calmer political scene, an upbeat earning season and seemingly healthier global growth, we expect a significant number of rising stars to materialize,” the analysts led by Souheir Asba said in a research note published Monday. “Europe seems to be leading the trend already.”

The trend marks the beginning of a recovery for corporate bond markets after more than $220 billion of global debt was downgraded to junk during the 2015 oil-price crash. European corporates are in a particularly strong position because they have been reducing debt loads to account for sluggish growth and increased uncertainty, the Bank of America analysts said.

So-called rising stars, or bonds that are upgraded to investment grade, present buying opportunities because the debt becomes eligible for purchase by a wider pool of investors. High-yield bonds of about 25 European companies are currently on the verge of being upgraded, a number not seen since before the global financial crisis, according to the report.

Yields typically start tightening when bonds that are rated one notch below investment grade are given a positive outlook by a credit-ratings agency, and then fall as much as 10 percent more in the days following the move, the Bank of America analysts said.

“The earlier the better, but if you miss the pre-positive announcement, the post-positive announcement and even the post-upgrade still offer decent relative value,” they said.

To contact the reporter on this story: Natasha Doff in Moscow at ndoff@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher, V. Ramakrishnan