Fallen Angels in 2025: Risks and Opportunities for Australian Investors

Fallen angels are making headlines in Australian financial markets, but not for reasons investors might hope. These are bonds that have been downgraded from investment grade to high-yield (or “junk”) status, often causing portfolio ripples and presenting both risk and reward. As we move through 2025, a surge in fallen angels is shifting the landscape for fixed income investors, super funds, and anyone with exposure to corporate debt. So, what’s driving this trend, and how should you respond?

What Are Fallen Angels, and Why Are They Rising in 2025?

A fallen angel is a bond originally issued with an investment-grade credit rating—think BBB- or above from S&P or Moody’s—that has since been downgraded to below investment grade. This reclassification typically signals a deterioration in the issuer’s financial health or broader sector challenges. In 2025, several factors are fueling the uptick in fallen angels across Australia and globally:

• Higher interest rates: Persistent rate hikes by the Reserve Bank of Australia (RBA) and other central banks have pushed up borrowing costs, squeezing corporate margins.

• Post-pandemic debt loads: Many companies took on extra debt during the COVID-19 era, and as repayments come due, balance sheets are under scrutiny.

• Sector-specific headwinds: Property, retail, and energy sectors have seen notable downgrades as business models struggle to adjust to new consumer trends and regulatory changes.

According to S&P Global’s March 2025 report, the Asia-Pacific region, including Australia, has seen a 22% increase in fallen angels year-on-year—a trend not seen since the early 2020s. Notable recent examples include several major ASX-listed property trusts and a handful of energy companies adapting to decarbonisation mandates.

Risks and Opportunities: Navigating Fallen Angels

For investors, fallen angels can be a double-edged sword. On the risk side, a downgrade can lead to:

• Immediate price drops: Many institutional investors, such as super funds and insurance companies, are restricted from holding sub-investment-grade assets and may be forced to sell, putting further downward pressure on prices.

• Increased default risk: The downgrade reflects deteriorating creditworthiness, raising the possibility of missed payments or even bankruptcy.

• Portfolio volatility: Bond indices and ETFs can see abrupt rebalancing, impacting passive investors.

But it’s not all doom and gloom. For those with a higher risk appetite, fallen angels have historically offered some compelling opportunities:

• Potential price rebound: Some fallen angels are downgraded due to temporary challenges. If the issuer stabilises, the bonds may recover in price, offering outsized returns compared to traditional high-yield bonds.

• Attractive yields: As prices fall, yields rise, sometimes outpacing the broader junk bond market.

• Diversification: Selectively adding fallen angels can diversify fixed-income portfolios, especially when paired with robust credit research.

For instance, in late 2024, several Australian infrastructure bonds were downgraded after regulatory changes but rebounded strongly after the companies secured new government contracts.

How Should Australian Investors Respond?

With more fallen angels expected in 2025, a proactive approach is essential. Here are some steps to consider:

• Review your bond exposure: Check whether your super fund, ETF, or managed fund holds significant investment-grade bonds at risk of downgrade. Managers like AustralianSuper and Vanguard have started publishing more detailed credit risk breakdowns in their 2025 disclosures.

• Assess your risk tolerance: If you’re retired or nearing retirement, increased portfolio volatility from fallen angels may be unwelcome. Younger investors, however, might use selective exposure for potential gains.

• Stay informed on ratings: Credit ratings agencies now offer more frequent updates and scenario analysis tools. Use these to track issuers most at risk of downgrade—especially in vulnerable sectors like commercial property, retail, and energy.

• Consider specialist funds: Some Australian fund managers have launched fallen angel strategies in 2025, aiming to capitalise on mispriced bonds with potential for recovery.

Remember, timing is crucial: buying too early can expose you to further downgrades, but waiting too long can mean missing the rebound. It’s a balancing act best navigated with solid research and a clear sense of your financial goals.

Conclusion: The Fallen Angel Era Isn’t Over

Australia’s bond market is in the midst of a fallen angel wave, and the effects are being felt across portfolios. While the risks are real—especially as economic growth slows and debt costs rise—savvy investors can also find opportunity in the chaos. Whether you’re looking to protect your capital or hunt for high-yield bargains, understanding the dynamics of fallen angels in 2025 is critical to making smarter investment decisions.