In City speak, a ‘fallen angel’ is the term for an investment bond that had a high credit rating and displayed exceptional performance but has since experienced a serious sustained decline in ratings and market demand. More often than not, ‘fallen angels’ become junk bonds, which fall outside the investment mandate of investment grade bond funds.
While a fallen angel is a term that originates from the credit markets, it’s one that can also be used to describe the performance of the FTSE 100’s shock underperformers of the past few years. Indeed, Standard Chartered (LSE: STAN), Centrica (LSE: CNA) and Tesco (LSE: TSCO) all have ‘fallen angel’ qualities as they were once sector leaders, but have tripped up and are now struggling to rebuild their reputations.
Unfortunately, all three of these companies are facing structural issues within their industries and for this reason it may take longer than many investors expect for Standard, Centrica and Tesco to stabilise their businesses and return to growth.
Multiple headwinds
Standard is facing the biggest challenge of the three. The company is trying to recover from years of a ‘growth at any price’, mentality that has left the bank with a wad of underperforming loans on its balance sheet. These loans coupled with Asia’s slowing economic growth are weighing on the Asia-focused lender’s outlook, and these pressures are unlikely to disappear anytime soon. What’s more, Standard’s fortunes are linked to Asia’s economic growth trajectory. If the region’s economic growth continues to slow, Standard’s recovery will hit a wall.
Shareholders will foot the bill
Centrica’s growth is being held back by a string of bad investment decisions by the company and price controls by regulators. At the same time, the company is having to invest more and more in its operations to continue to grow and offer the best level of service to customers.
Shareholders now seem to be footing the bill for Centrica’s mistakes. The company recently announced that it would raise £700m by way of a share placing to institutional investors. Management has stated that the funds are to help the group pay down debt and fund acquisitions, although around half of the cash will be returned to investors via dividends this year. As a result, further fundraisings could be on the horizon.
Hero to zero
Lastly, Tesco used to be the most important company in the UK retail sector. However, after years of mistakes, a price war and accounting scandal, most investors now give the company a wide berth. And it looks as if things are only going to get harder for the group going forward. There’s talk of another imminent price war between the UK supermarkets and the company has yet to reveal how the impact of the new national living wage will affect its cost base.
Some City analysts believe that Tesco’s cost bill could increase by as much as £200m thanks to new wage and pension changes, despite the fact that the company has sought to save more than £200m from its cost base during the past two years. Sadly, there could be more pain ahead for Tesco’s investors.