Fallen angels are angels expelled from heaven. In investing terms, it refers to bonds that were initially investment-grade but have since been downgraded to sub- investment or junk status.

Fallen angels pose an investment risk for credit unions that could result in the crystallising of significant financial losses.

Under regulations where an investment made by a credit union in government or corporate bonds no longer complies with the minimum rating requirements, the credit union must dispose of that investment as soon as possible. A downgrading of an investment arises from a perception of higher default risk.

This will see the bond yield increase and its price decrease by a multiple equivalent to the remaining term. Often compounding the downward movement in prices is the forced sale from institutional investors and investment funds whose investment policies compel them to sell.

S&P report there are nearly €2 trillion of BBB non-financial bonds in issue in the EMEA. They expect nearly 3% of these bonds to be downgraded within 2021, although the level of downgrades is expected to decline as the economic recovery gains momentum.

The European Systemic Risk Board (ESRB) is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. In November 2020, the ESRB highlighted its concerns for the procyclical impact of downgrades of corporate bonds on markets and entities across the financial system.

For some unexplained reason, credit unions are permitted to invest in bank bonds of all investment and sub-investment grades. The paradox for credit unions could be that investing in risky bank bonds is a less risky strategy than investing in other investment grade instruments.