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Fallen Angels of the Stock Market

20 July 2009 - News - Editor

While there may be some dissension in the world of finance with regard to the meaning of the term "fallen angels", in general it refers to stocks that were once highly sought after and, due to any number of reasons, have fallen from grace with investors. The recent spate of companies that have had their credit ratings downgraded to below investment grade or "junk" status are considered to be fallen angels.

A prime example of a fallen angel is the CIT Group, which was downgraded by S&P to BB minus on 12 June, putting it three steps below investment grade. The fate of the US commercial lender hangs in the balance as the US government declined its appeal for assistance over and above the $2.3 billion extended last December. CIT Group has now turned to key bondholders to raise the $3 billion needed to avoid bankruptcy. In the event of the company raising the needed funds, it would be a high-interest, short-term solution, but could possibly buy sufficient time to make changes and stay afloat. While it is a fraction of the size of last year’s casualties - Lehman Brothers, Washington Mutual, AIG and Fannie Mae - as a lender to small and midsize businesses, as well as issuing start-up loans for entrepreneurs, its failure would put extra pressure on small businesses that are already battling to keep going. Many of the job losses being experienced in the US are as a result of cost-cutting measures at small and midsize businesses. Many small businesses also rely heavily on the factor financing service offered by CIT Group, whereby the finance company buys invoices at a percentage of their face value, paying the business out immediately and assuming the task, and associated risk, of collecting payment for the invoices from customers. This practice assists small businesses with regard to operating cash and could have devastating results if cut off.

More often than not fallen angels fade into obscurity, but some have been known to recover, depending on the reason behind the fall. General Motors is an example of a fallen angel that has, with substantial government assistance, the potential of reaching great heights again. There was a time when the term "solid investment" went hand-in-hand with General Motors. While that era is likely never to be repeated, the restructured company is expected to become profitable again. On the other hand, Washington Mutual, a victim of the sub-prime mortgage crisis, became a fallen angel destined never to rise again.

 


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