Bond credit rating

In investment, the bond credit rating assesses the credit worthiness of a corporation's debt issues. It is analogous to credit ratings for individuals and countries. The credit rating is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies such as Moody's, Standard & Poor's, and Fitch to have letter designations such as AAA, B, CC, etc.

Moody's		S&P		Fitch
Long Term	Short Term	Long Term	Short Term	Long Term	Short Term
Aaa	P-1	AAA	A-1+	AAA	A1+	Prime
Aa1		AA+		AA+		High grade
Aa2		AA		AA
Aa3		AA-		AA-
A1		A+	A-1	A+	A1	Upper medium grade
A2		A		A
A3	P-2	A-	A-2	A-	A2
Baa1		BBB+		BBB+		Lower medium grade
Baa2	P-3	BBB	A-3	BBB	A3
Baa3		BBB-		BBB-
Ba1	Not Prime	BB+	B	BB+	B	Non Investment grade speculative
Ba2		BB		BB
Ba3		BB-		BB-
B1		B+		B+		Highly Speculative
B2		B		B
B3		B-		B-
Caa1		CCC+	C	CCC	C	Substantial risks
Caa2		CCC				Extemely speculative
Caa3		CCC-				In default with little prospect for recovery
Ca		CC
/		D	/	DDD	/	In default
/				DD
/				D

Credit rating agencies

See also: Credit rating agency

In the United States of America, there are eight rating agencies that have received the Nationally Recognized Statistical Rating Organization (NRSRO) designation, and are overseen by the SEC in their assignment of credit ratings: Standard & Poor's (S&P), Moody's, Fitch, A. M. Best, Egan-Jones Rating Company (also known as EJR), Japan Credit Rating Agency, Ltd., Ratings and Investment Information, Inc. and Dominion Bond Rating Service. S&P, Moody's, and Fitch are far larger than Japan CRA, R&I, A.M. Best, EJR, and Dominion, and dominate the market with approximately 90-95 percent of world market share.

Credit Rating Tiers

Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, D.

As of October 16th, 2009, there were 4 companies rated AAA by S&P:

• Automatic Data Processing (NYSE:ADP)
• Johnson & Johnson (NYSE:JNJ)
• Microsoft (NASDAQ:MSFT)
• ExxonMobil (NYSE:XOM)

Moody's, S&P and Fitch will all also assign intermediate ratings at levels between AA and CCC (e.g., BBB+, BBB and BBB-), and may also choose to offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

Moody's	Standard & Poor's	Credit worthiness
Aaa	AAA	Triple A = Credit risk almost zero
Aa1	AA+	Safe investment, low risk of failure
Aa2	AA	"
Aa3	AA-	"
A1	A+	Safe investment, unless unforeseen events should occur in the economy at large or in that particular field of business
A2	A	"
A3	A-	"
Baa1	BBB+	Medium safe investment. Occurs often when economy has deteriorated. Problems may arise
Baa2	BBB	"
Baa3	BBB-	"
Ba1	BB+	Speculative investment. Occurs often in deteriorated circumstances, usually problematic to predict future development
Ba2	BB	"
Ba3	BB-	"
B1	B+	Speculative investment. -Deteriorating situation expected
B2	B	"
B3	B-	"
Caa	CCC	High likelihood of bankruptcy or other business interruption
Ca	CC	"
C	C	"
	D	Bankruptcy or lasting inability to make payments most likely
WR		Rating withdrawn
NR		Not rated

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 (MBSs) and collateralized debt obligations (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.

Municipal Bonds

Municipal bonds, instruments issued by local, state, or federal governments in the United States, have a separate naming/classification system which mirrors the tiers for corporate debt.

Default Rates

The historical default rate for municipal bonds is lower than that of corporate bonds. The Municipal Bond Fairness Act (HR 6308), introduced September 9 2008, included the following table giving bond default rates up to 2007 for municipal versus corporate bonds by rating and rating agency.

Cumulative Historic Default Rates (in percent)
------------------------------------------------------------------------
                                        Moody's               S&P
        Rating categories        ---------------------------------------
                                    Muni      Corp      Muni      Corp
------------------------------------------------------------------------
Aaa/AAA.........................      0.00      0.52      0.00      0.60
Aa/AA...........................      0.06      0.52      0.00      1.50
A/A.............................      0.03      1.29      0.23      2.91
Baa/BBB.........................      0.13      4.64      0.32     10.29
Ba/BB...........................      2.65     19.12      1.74     29.93
B/B.............................     11.86     43.34      8.48     53.72
Caa-C/CCC-C.....................     16.58     69.18     44.81     69.19
Investment Grade................      0.07      2.09      0.20      4.14
Non-Invest Grade................      4.29     31.37      7.37     42.35
All.............................      0.10      9.70      0.29     12.98
------------------------------------------------------------------------

See also

• Credit risk
• Default (finance)

References

http://www2.standardandpoors.com/aboutcreditratings/Images/Summary_SPRatings_large.gif

External links

• "What Is A Corporate Credit Rating?", Investopedia.com
• "As company priorities shift, fewer get AAA debt rating," USA Today (Mar 2005)
• "Fitch says confident in "AAA" subprime ratings", Reuters (Jul 2007)