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PG&E Bonds Won't Be In This Bond ETF Anytime Soon

January 18, 2019 3:04 pm
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Shares of PG&E Corp. (NYSE:PCG), the embattled California utility, have shed a stunning 70 percent of their value this year as the company is considering bankruptcy amid facing $30 billion in liabilities from the 2017 and 2018 California wildfires.

The specter of bankruptcy and those wildfire claims prompted ratings agencies to slash PG&E's corporate credit rating.

What To Know

A corporate credit rating that was once BBB- is now C, the really speculative end of the highly speculative junk bond ratings spectrum.

While PG&E bonds meet the definition of fallen angels, corporate bonds born with investment-grade ratings that are later downgrade to junk status, investors shouldn't expect to see the utility's debt appearing in the VanEck Vectors Fallen Angel High Yield Bond ETF (NYSE:ANGL) in the near-term.

ANGL is the oldest and largest exchange traded fund dedicated to fallen angel bonds. The fund holds 225 bonds that once carried investment-grade ratings.

Why It's Important

ANGL, which turns seven years old in April, follows the ICE BofAML US Fallen Angel High Yield Index (H0FA). That benchmark “is comprised of below investment grade corporate bonds denominated in U.S. dollars, issued in the U.S. domestic market and that were rated investment grade at the time of issuance,” according to VanEck.

ANGL's index provider is opting against the inclusion of PG&E bonds in its various benchmarks, meaning ANGL investors will not be seeing the utility operator's debt in the ETF anytime soon.

“On January 15, ICE BofAML announced that, although the bankruptcy filing date would fall after the preview date for its high yield indexes, PG&E’s bonds would NOT be added to the ICE BofAML high yield indexes, including the US High Yield Index or the US Fallen Angel High Yield Index,” said VanEck in a recent note.

As of the end of 2018, ANGL allocated just 6.65 percent of its weight to CCC-rated debt and the bulk of those bonds in ANGL are rated CCC+.

What's Next

While ANGL would miss out on any potential near-term rally in PG&E bonds, it may be to the benefit of the ETF's investors that those bonds currently are excluded from the fund.

“We believe the indexer has exercised discretion with regard to the index rules in a thoughtful and prudent manner,” said VanEck. “That is not to say the bonds in question are certain to fall further in value, that PG&E investors have been saved from losses, or that the bonds cannot rally from here. Markets are quick to price in bad news, and the reorganization of PG&E could, under reasonable assumptions, leave a high recovery value for the bonds.”

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