Credit rating by large credit agencies

This article will discuss the detail credit rating scores created by large international credit agencies.

Credit scores

The credit rating scores usually contains long-term rating, outlooks and short-term rating. Below take S&P’s and Moody’s rating scores as example to explain the meaning of each score.

Long-Term Ratings
Long-term ratings are assigned to issues with maturities that are generally more than one year, such as 10-year term bonds or bank loans, or even medium term notes which usually have maturities of 3 to 5 years.
‘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.‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.‘BBB-‘—Considered lowest investment grade by market participants.‘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’—Currently highly vulnerable obligations and other defined circumstances.‘D’—Payment default on financial commitments.

According to S&P 2011 annual European corporate default study shows :Higher-rated companies generally took longer, on average, to default than lower-rated companies did. Stability rates (the proportion of unchanged ratings) were higher for companies with investment-grade ratings ('BBB-' and higher) than they were for companies rated speculative grade ('BB+' and lower).

Moody uses slight different score for long term credit ratings. But the criteria are similar with S&P and Firth.


OUTLOOKS
Outlooks are assigned by using “positive,” “negative,” “stable,” or “developing” to its long-term credit rate. A positive outlook suggests that the issuer’s rating may be raised, while a negative outlook indicates it may be lowered. Outlooks typically have a six-month to two-year time frame and address trends or risks with the potential, but not the certainty, of raising or lowering a credit rating sometime over the next two years. Outlooks that use the term “stable” indicate that a change is unlikely, though that opinion is not a comment on the stability of the issuer’s financial performance. Those that use the term “developing” describe unique situations where the effect of future events is so uncertain that the rating could either be raised or lowered.

Short-Term Ratings
Short-term ratings express opinions about the creditworthiness of an issuer or the credit quality of a debt issue in the near future. As a general rule, short-term ratings are used for issues that have maturities of one year or less, such as commercial paper
Short term ratings range from ‘A-1+,’ to ‘D,’. A-1+ represents extremely strong ability to meet obligations, D indicates payment default. The long- and short-term ratings are generally linked to one another