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Posted in Commentary on the Investment Environment.

Standard & Poor's Ratings

Standard & Poors LogoWhat do Standard & Poors ratings mean?

Standard & Poors is a company that analyses countries, businesses, and individual securities and expresses an opinion on how likely it is that the entity will be able to meet its future financial commitments, its credit worthiness.

A paper called Standard and Poors Guide to Credit Ratings Essentials provides an overview of different business models and methodologies used by credit rating agencies. It also describes generally how Standard & Poor’s forms its ratings opinions about issuers and individual debt issues, monitors and adjusts its ratings, and studies ratings changes over time.

It points out several key things you should know about credit ratings:

  • Credit ratings are opinions about relative credit risk.
  • Credit ratings are not investment advice, or buy, hold, or sell recommendations. They are just one factor investors may consider in making investment decisions.
  • Credit ratings are not indications of the market liquidity of a debt security or its price in the secondary market.
  • Credit ratings are not guarantees of credit quality or of future credit risk.

General summary of the opinions reflected by Standard & Poor’s ratings

INVESTMENT
GRADE

‘AAA’ Extremely strong capacity to meet financial commitments.
Highest rating

‘AA’ Very strong capacity to meet financial commitments

‘A’ Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances

‘A’ Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances

‘BBB’ Adequate capacity to meet financial commitments, but more subject to adverse economic conditions

‘BBB-’ Considered lowest investment grade by market participants

SPECULATIVE
GRADE

‘BB+’ Considered highest speculative grade by market participants

‘BB’ Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions

'B’ More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments

‘CCC’ Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments

‘CC’ Currently highly vulnerable

‘C’ A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued

‘D’ Payments default on financial commitments

Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

Investment and Speculative grade debt

The term “investment grade” historically referred to bonds and other debt securities that bank regulators and market participants viewed as suitable investments for financial institutions. Now the term is broadly used to describe issuers and issues with relatively high levels of creditworthiness and credit quality. In contrast, the term “noninvestment grade,” or “speculative grade,” generally refers to debt securities where the issuer currently has the ability to repay but faces significant uncertainties, such as adverse business or financial circumstances.

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