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In investment, the bond credit rating represents the credit worthiness of corporate or government bonds. It is not the same as an individual's credit score. The ratings are published by
credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...
and used by investment professionals to assess the likelihood the debt will be repaid.


Credit rating agencies

Credit rating is a highly concentrated industry with the "Big Three" credit rating agenciesFitch Ratings,
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
and Standard & Poor's (S&P) – controlling approximately 95% of the ratings business.
Credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...
registered as such with the SEC are "
nationally recognized statistical rating organization A nationally recognized statistical rating organization (NRSRO) is a credit rating agency (CRA) approved by the U.S. Securities and Exchange Commission (SEC) to provide information that financial firms must rely on for certain regulatory purp ...
s". The following firms are currently registered as NRSROs: A.M. Best Company, Inc.; DBRS Ltd.; Egan-Jones Rating Company; Fitch, Inc.; HR Ratings; Japan Credit Rating Agency
Kroll Bond Rating Agency
Moody's Investors Service, Inc.; Rating and Investment Information, Inc.; Morningstar Credit Ratings, LLC; and Standard & Poor's Ratings Services. Under the Credit Rating Agency Reform Act, an NRSRO may be registered with respect to up to five classes of credit ratings: (1) financial institutions, brokers, or dealers; (2) insurance companies; (3) corporate issuers; (4) issuers of asset-backed securities; and (5) issuers of government securities, municipal securities, or securities issued by a foreign government. In Asia, the regulated and recognized credit rating agencies in the domestic markets are – in China: China Chengxin International (CCXI), China Lianhe Credit Rating (Lianhe Ratings), New Century Zixin Assessment Investment Service, Pengyuan Credit Rating; in Japan: Rating and Investment Information (R&I); in India: ICRA (ICRA), Credit Analysis and Research (CARE) and CRISIL.


Credit rating codes and classes

The credit rating is a financial indicator to potential investors of
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
such as bonds. These are assigned by
credit rating agencies A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default. An agency may ra ...
such as Moody's, Standard & Poor's, and Fitch, which publish code designations (such as AAA, B, CC) to express their assessment of the risk quality of a bond. Moody's assigns bond credit ratings of
Aaa AAA, Triple A, or Triple-A is a three-letter initialism or abbreviation which may refer to: Airports * Anaa Airport in French Polynesia (IATA airport code AAA) * Logan County Airport (Illinois) (FAA airport code AAA) Arts, entertainment, and me ...
, Aa, A, Baa, Ba, B, Caa, Ca, C, as well as WR and NR for 'withdrawn' and 'not rated' respectively. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D. Currently there are only two companies in the United States with an AAA credit rating:
Microsoft Microsoft Corporation is an American multinational technology corporation producing computer software, consumer electronics, personal computers, and related services headquartered at the Microsoft Redmond campus located in Redmond, Washin ...
and Johnson & Johnson. These individual codes are grouped into broader classes described as "investment grade" or not, or in numbered tiers from high to low. In addition to the rating codes, agencies typically supplement the current assessment with indications of the chances for future upgrades or downgrades over the medium term. For example, Moody's designates an ''Outlook'' for a given rating as Positive (POS, likely to upgrade), Negative (NEG, likely to downgrade), Stable (STA, likely to remain unchanged), or Developing (DEV, contingent on some future event).


Rating tier definitions


Investment grade

A bond is considered investment grade or IG if its credit rating is BBB− or higher by Fitch Ratings or S&P, or Baa3 or higher by
Moody's Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides internationa ...
, the so-called "Big Three" credit rating agencies. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them. Ratings play a critical role in determining how much companies and other entities that issue debt, including sovereign governments, have to pay to access credit markets, i.e., the amount of interest they pay on their issued debt. The threshold between investment-grade and speculative-grade ratings has important market implications for issuers' borrowing costs. Bonds that are not rated as investment-grade bonds are known as high yield bonds or more derisively as
junk bonds In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit events ...
. The risks associated with investment-grade bonds (or investment-grade
corporate debt A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity of ...
) are considered significantly higher than those associated with first-class government bonds. The difference between rates for first-class government bonds and investment-grade bonds is called investment-grade spread. The range of this spread is an indicator of the market's belief in the stability of the economy. The higher these investment-grade spreads (or
risk premium A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less t ...
s) are, the weaker the economy is considered.


Criticism

Until the early 1970s, bond credit ratings agencies were paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their particular offerings. Starting in the early 1970s, the "Big Three" ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings, which has led to charges that these ratings agencies can no longer always be impartial when issuing ratings for those securities issuers. Securities issuers have been accused of "shopping" for the best ratings from these three ratings agencies, in order to attract investors, until at least one of the agencies delivers favorable ratings. This arrangement has been cited as one of the primary causes of the subprime mortgage crisis (which began in 2007), when some securities, particularly
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...
(MBSs) and
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS).Le ...
s (CDOs) rated highly by the credit ratings agencies, and thus heavily invested in by many organizations and individuals, were rapidly and vastly devalued due to defaults, and fear of defaults, on some of the individual components of those securities, such as home loans and credit card accounts. Other countries are beginning to mull the creation of domestic credit ratings agencies to challenge the dominance of the "Big Three", for example in Russia, where the ACRA was founded in 2016.


Municipal bonds

Municipal bonds are instruments issued by local, state, or federal governments in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
. Until April–May 2010, Moody's and Fitch were rating municipal bonds on the separate naming/classification system which mirrored the tiers for corporate bonds. S&P abolished its dual rating system in 2000.


Default rates

The historical default rate for municipal bonds is lower than that of corporate bonds. A potential misuse of historic default statistics is to assume that historical average default rates represent the " probability of default" of debt in a particular rating category. However, ..default rates can vary significantly from one year to the next and the observed rate for any given year can vary significantly from the average.


AAA Rating

AAA is the highest credit rating that any of the major credit rating agencies can give to an issuer's bond


AAA Rated Bonds

AAA-rated bonds have a high credit rating because their issuers are able to meet their financial obligations with ease and have the lowest risk of defaul


See also

*
Credit risk A credit risk is risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
* Default (finance) * List of countries by credit rating


References


External links


"What Is A Corporate Credit Rating?"
Investopedia.com
Investment Grade Real Estate , How To Purchase Property With Credit Rated Tenants


(Mar 2005)
"Fitch says confident in 'AAA' subprime ratings", Reuters
(Jul 2007) {{DEFAULTSORT:Bond Credit Rating Bond market Investment Credit rating Credit risk Bond valuation de:Rating#Ratingcodes