Issue credit rating is rating of companies into different categories based on their creditworthiness. These ratings can be looked as an indication of the default risk associated with that debt-instrument.
The rating is generally based on numerous factors including the financial condition of the company, the currency denomination in which the bond/debt instrument is issued, etc. Credit rating agencies look at the likelihood of fulfillment of the financial obligations. They measure the capacity of payment of the company, nature of the obligation and provisions, is any, present in the obligation.
Credit rating companies have two different rating systems for long-term (> 1 year) and short term (<1 year)
The rating is generally based on numerous factors including the financial condition of the company, the currency denomination in which the bond/debt instrument is issued, etc. Credit rating agencies look at the likelihood of fulfillment of the financial obligations. They measure the capacity of payment of the company, nature of the obligation and provisions, is any, present in the obligation.
Credit rating companies have two different rating systems for long-term (> 1 year) and short term (<1 year)
Ratings above BBB/Bbb (inclusive) are considered as of Investment Grade, while lower ratings come under Junk bond category. The junk bond doesn't mean that it is worth nothing. The junk bonds are speculative grade bond and they offer higher yields because of higher risk. However, because of higher default risk these bonds are not recommended for pension funds etc, where capital protection is a prime concern.
The short term rating system is similar but uses different codes for each category. While Standard & Poor’s and Fitch give ratings of A-1+, A-1-, A-2, A-3, B, C, &D, Moody’s rates them as P-1, P-2, & P-3. A-1, A-2, A-3 are equivalent to P-1, P-2, & P-3. A-1+ and AA- correspond to AAA and AA, used in long-term ratings. Moody’s P-1 includes both AAA and AA. A-3 and P-3 correspond to the lowest amongst the investment grade equivalent to BBB. While Moody’s doesn’t rate sub-prime short-term debt issues S&P, Fitch have ratings B & C which are similar to BB, B & CCC, CC, C of long-term issue.
The top credit rating agencies of the world are shown below.
The short term rating system is similar but uses different codes for each category. While Standard & Poor’s and Fitch give ratings of A-1+, A-1-, A-2, A-3, B, C, &D, Moody’s rates them as P-1, P-2, & P-3. A-1, A-2, A-3 are equivalent to P-1, P-2, & P-3. A-1+ and AA- correspond to AAA and AA, used in long-term ratings. Moody’s P-1 includes both AAA and AA. A-3 and P-3 correspond to the lowest amongst the investment grade equivalent to BBB. While Moody’s doesn’t rate sub-prime short-term debt issues S&P, Fitch have ratings B & C which are similar to BB, B & CCC, CC, C of long-term issue.
The top credit rating agencies of the world are shown below.
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