Monday, March 4, 2024
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HomeBondsThe Ultimate Credit Rating Cheat Sheet

The Ultimate Credit Rating Cheat Sheet

Ever puzzled over those ABCs next to companies, like XYZ being AA-rated? Curious about what those letters mean and how they impact a part-time investor like you? Relax, kick back, and dive into this cheat sheet on credit rating alphabets, including the corporate ABCD. It’s time to demystify the financial jargon and turn those credit ratings into your secret weapon in the world of investing!

We will also provide hypothetical examples to help you understand what each rating means in practice.

AAA

The highest possible credit rating is AAA. This rating is assigned to borrowers who are considered to be extremely unlikely to default on their debts. In the case of companies, they would typically have a long history of profitability and strong financial stability.

Example:

  • Company: Microsoft Corporation
  • Credit Rating: AAA

AA+ and AA

AA+ and AA are the next highest credit ratings. These ratings are still considered to be very strong, but they indicate a slightly higher risk of default than AAA.

Example:

  • Company: Apple Inc.
  • Credit Rating: AA+

AA-

AA- is the lowest of the investment-grade credit ratings. This rating indicates that the borrower is still considered to be a good investment, but there is a moderate risk of default.

Example:

  • Company: Accenture
  • Credit Rating: AA

A+ and A

A+ and A are the highest of the non-investment-grade credit ratings. These ratings indicate that the borrower has a significant risk of default.

Example:

  • Company: Pfizer
  • Credit Rating: A+

A- and BBB+

A- and BBB+ are the next highest non-investment-grade credit ratings. These ratings indicate that the borrower has a high risk of default.

Example:

  • Company: Tesla Inc.
  • Credit Rating (Standard & Poor’s): BB (equivalent to BBB+)

BBB and BBB-

BBB and BBB- are the lowest of the non-investment-grade credit ratings. These ratings indicate that the borrower has a very high risk of default.

Example:

  • Company: Reliance Industries
  • Credit Rating: BBB

BB+ and BB

BB+ and BB are the highest of the junk bond ratings. These ratings indicate that the borrower has an extremely high risk of default.

Example:

  • Company: Softbank
  • Credit Rating: BB

BB- and B+

BB- and B+ are the next highest junk bond ratings. These ratings indicate that the borrower has a very high risk of default.

Example:

  • Company: Netflix
  • Credit Rating: BB-

B and B-

B and B- are the lowest of the junk bond ratings. These ratings indicate that the borrower is almost certain to default on its debts.

Example:

  • Company: Tesla
  • Credit Rating: B-

C and D

C and D are the lowest possible credit ratings. These ratings indicate that the borrower has defaulted on its debts.

Example:

  • Company: Lehman Brothers Holdings Inc.
  • Credit Rating (Fitch Ratings): D

Summary:

Investment grade Moody’s Standard & Poor’s Fitch
Strongest Aaa AAA AAA
Aa1 AA+ AA+
Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Baa2 BBB BBB
Baa3 BBB- BBB-

 

Non-investment-grade Moody’s Standard & Poor’s Fitch
Ba1 BB+ BB+
Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
B2 B B
B3 B- B-
Caa1 CCC+ CCC+ 
Caa2 CCC CCC
Caa3 CCC- CCC-
Ca CC CC

 

Weakest Moody’s Standard & Poor’s Fitch
C C C
D D

Conclusion

Credit ratings are a valuable tool for investors. By understanding what the different credit ratings mean, you can make more informed investment decisions.

It is important to note that credit ratings are not foolproof. There have been instances where companies with high credit ratings have defaulted on their debts. However, credit ratings can still provide valuable insights into the risk of default and help investors make informed decisions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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