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Bonds News

Reuters guide to credit ratings

 This Reuters guide is based on definitions and tables
available from the main ratings agencies.
 Credit ratings are the international standard by which
investors can compare and assess the credit quality of bond
issuers and rated debt securities.
 An increasing reliance on these ratings by investors and a
decreased stigma attached to low ratings means that issuers are
finding it harder to issue bonds without first obtaining a
credit rating. This decreased stigma is due to narrowing credit
spreads over the last few years and the increased willingness of
companies to take on debt to fund payouts to shareholders and
make themselves less attractive takeover targets for private
equity firms.
 Issuer Credit Ratings are the key indicators used by
investors when looking at the security of return on a potential
bond purchase. These ratings are divided in to Long-Term and
Short-Term categories based on the form of debt instrument
concerned.
 Long-term ratings concern medium or long-term notes in
either local or foreign currencies. Short-term ratings are
assigned to instruments considered short term in the relevant
market, such as those with maturities of 365 days or less in the
U.S. They also indicate the creditworthiness of an issuer in
respect of put options on long-term debts.
 Ratings fall into two categories: Investment-grade debt, in
which the historical rate of default is non-existent or very
low, and Speculative-grade debt, which has a relatively high or
imminent risk of default. Within these categories are multiple
ratings, ranging from borrowers with the most creditworthy AAA
ratings, to those with a D rating indicating that they are in
default. 
 These ratings are further modified by plus (+) and minus (-)
signs or numbers 1-3 to indicate their relative position within
the wider category. For ratings relating to defaulted
obligations, the different categories relate to the likelihood
of investors re-couping some or all of their investment.
                LONG-TERM CREDIT RATINGS
 
CREDIT QUALITY     STANDARD & POOR'S    MOODY'S   FITCH    ADR*

------------------------INVESTMENT GRADE------------------------

HIGHEST                     AAA          Aaa       AAA     0.000
QUALITY
 
SUBSTANTIAL                 AA+          Aa1       AA+     0.000
PAYMENT CAPACITY            AA           Aa2       AA
                         AA-          Aa3       AA-   
 
HIGH PAYMENT                A+           A1        A+      0.012
CAPACITY                    A            A2        A
                         A-           A3        A-
 
 
ADEQUATE PAYMENT            BBB+         Baa1      BBB+    0.107
CAPACITY                    BBB          Baa2      BBB
                         BBB-         Baa3      BBB-

------------------------SPECULATIVE GRADE-----------------------

PAYMENT CAPACITY            BB+          Ba1       BB+     0.744
VULNERABLE TO ADVERSE       BB           Ba2       BB
CHANGES                     BB-          Ba3       BB-
 
 
PAYMENT CAPACITY NOT        B+           B1        B+      3.317
SUFFICIENTLY PROTECTED      B            B2        B
AGAINST ADVERSE CHANGES     B-           B3        B-
 
THERE IS A POSSIBILITY      CCC+         Caa1      CCC+   13.216
OF DEFAULT, REPAYMENT       CCC          Caa2      CCC
RELIES ON POSITIVE          CCC-         Caa3      CCC-
CONDITIONS                  CC                     CC
                                                C


OBLIGATIONS ARE IN          SD*1         Ca        DDD
DEFAULT                     D            C         DD
                                                D

*  Moody's annual default rate over one year as a percentage of
rated issuers, based on figures from 1982-2006 

*1 Selective Default, where an issuer has defaulted on some of
its obligations but may continue to make timely payments on
others
*****************************************************************
                SHORT-TERM CREDIT RATINGS

CREDIT QUALITY     STANDARD & POOR'S    MOODY'S   FITCH

------------------------INVESTMENT GRADE------------------------

HIGHEST                     A-1         Prime-1     F1
QUALITY


GOOD CREDIT                 A-2         Prime-2     F2
QUALITY


ADEQUATE CREDIT             A-3         Prime-3     F3
QUALITY
 
------------------------SPECULATIVE GRADE-----------------------

PAYMENT CAPACITY            B-1         Not        B
VULNERABLE TO               B-2         Prime
ADVERSE CHANGES             B-3         (NP)


HIGH DEFAULT RISK           C           NP         C


UNDER REGULATORY            R           NP
SUPERVISION


CURRENTLY DEFAULTING        SD*         NP         D
                         D
 *Selective Default, where an issuer has defaulted on some of
its options but will continue to make timely payments on
others
 
*****************************************************************    
 As well as these ratings, all three rating agencies give
Outlooks. These assess the potential direction of an issuer's
credit rating over the medium term (generally between six months
and two years). A Positive rating outlook indicates a potential
a credit rating upgrade. A Negative outlook shows a potential
downgrading, while a Stable outlook means there is little chance
of a change. 
 Each agency operates a rating watch (Watchlist-Moody's,
CreditWatch-Standard & Poor's, Rating Watch-Fitch). Issuers are
placed on a rating watch if an agency is actively reviewing
their current credit rating. These reviews are typically
completed over a short period of time such as three months.
Watches are also given a rating which can be Positive, Negative
or Developing/Evolving (indicating that a rating could go up or
down).
 In addition to these core ratings, increasing significance
is being attached to Recovery Ratings (Standard & Poor's and
Fitch) and Loss Given Default Ratings (Moody's). RR's predict
the return an investor would receive should payments be
defaulted, LGDR's predict the potential loss.
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