Sovereign risk in the Middle East will not factor much into fallen angel risk, as more than 90% of the region’s IG issuance is from countries rated A or higher 1. As such, we believe fallen angel risk within Asia is low and issuer-specific. India’s sovereign downgrade presents a potential risk of fallen angels, however we expect India will maintain its IG ratings. While Asia accounts for nearly 50% of IG EM corporate issuance, the majority is highly rated, at BBB or higher 1.

Latin America is expected to contribute roughly 75% of EM fallen angels in 2020 1, with the majority concentrated in Mexico (dominated by Pemex) and Brazil, where escalating sovereign risk due to political turmoil and ambitious fiscal responses to Covid-19 will place IG issuers under rating pressure. Rating agencies set ceilings on corporate ratings relative to their respective sovereigns, and as in 2015, when sovereign downgrades of Brazil and Russia contributed to the record levels of fallen angels, sovereign risk is the main factor driving expectations in 2020.Įxcluding issuers whose downgrade risk emanates from a negative sovereign outlook, fallen angels in EM are expected to range from 4% to 5% in 2020 on a standalone basis, not much higher than in the US (at 3.7%) or the EU (at 4.3%).

Negative rating outlooks and near-term macroeconomic challenges factor into expectations that the percentage of fallen angels among EM corporates in 2020 is likely to be elevated, potentially surpassing the 2015 record of 13.6%. To date, nearly 250 EM corporate and quasi-sovereign issuers have been downgraded in 2020, including nearly 8% of EM IG corporate and quasi-sovereign issuers that have been cut to high yield, highlighted by Mexico’s Pemex, which represented 6.6% of the EM IG market 1. Sources of EM fallen angel risk are highly concentrated While downgrades are inevitable, we assessed the risk of the deterioration in credit ratings and found that the damage may not be as clear-cut (or as severe) as the headlines might suggest.

While topline expectations for the rate of fallen angels among EM investment grade ('IG') corporates may cause concern, a closer look at the factors contributing to those expectations reveals greater stability than may be perceived – along with potential opportunities that downgrades may present to EM investors. Jonathan Davis, Client Portfolio Manager, Emerging Markets Fixed Income, New York By Steve Cook, Co-Head of Emerging Markets Fixed Income, London, and

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