A credit rating for a bond conveys the creditworthiness of a bond. The rating is provided by Standard and Poors and is based on the issuer's financial stability and ability to meet its debt obligations.
How do you interpret bonds’ credit rating?
The methodology around rating bonds involves thoroughly analysing various factors, including financial strength, industry dynamics, economic conditions, and legal and regulatory environments.
For issuer ratings, S&P considers factors such as the issuer's financial performance, leverage, liquidity, and cash flow generation. It also evaluates qualitative aspects like management quality, corporate governance, and business risk profile. The rating scale for issuer credit ratings typically ranges from 'AAA' (highest credit quality) to 'D' (default).
When it comes to instrument/issue ratings, S&P assesses the specific characteristics of the financial instrument, such as its priority of payment, collateral, and covenants. The analysis also considers the likelihood of default and recovery prospects in the event of default. The rating scale for instrument/issue credit ratings also ranges from 'AAA' to 'D'.
Below is an overview of ratings and outlines what investors can expect of issuers or instruments with these rating.
- AAA: An obligation rated 'AAA' has the highest rating assigned by S&P Global Ratings. The obligor's capacity to meet its financial commitment to the obligation is extremely strong.
- AA+, AA, AA-: An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment to the obligation is very strong.
- A+, A, A-: An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment to the obligation is still strong.
- BBB: An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment to the obligation.
- BB+, BB, BB-: An obligation rated 'BB' is less vulnerable in the near term than other lower-rated obligations. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment to the obligation.
- B+, B, B-: An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment to the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment to the obligation.
- CCC: An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment to the obligation.
- CC+, CC, CC-: An obligation rated 'CC' is currently highly vulnerable to nonpayment.
- C+, C, C-: The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.
- D: An obligation rated 'D' is in default or in breach of an imputed promise. For hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due unless S&P Global Ratings believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be considered tantamount to a missed payment.
S&P evaluates credit ratings in both local and foreign currencies. Local currency ratings reflect the creditworthiness of an issuer or instrument in its domestic currency and are denoted by the same scale as foreign currency ratings. Foreign currency ratings assess credit risk in a currency other than the issuer's domestic currency, considering factors like exchange rate risk and the availability of foreign exchange reserves.
Overall, S&P's credit rating methodology aims to provide a transparent and consistent assessment of credit risk, enabling investors and market participants to make informed decisions. The rating scale provides a clear indication of credit quality and helps market participants understand the relative credit risk associated with different issuers and financial instruments.
Where can I find the credit rating of a bond?
To access the credit rating of a bond, you can follow these steps:
Click on any bond in the platform > make sure you are in the Product overview tab > scroll down and see Credit rating.