5.4.1.1. Bond Rating Services
Before a bond is issued, it is rated according to its creditworthiness. Private ratings services, such as Standard & Poor’s, Moody’s Investors Services, and Fitch Ratings, are hired by the issuing company to assess the financial strength of the company. Their evaluation of the company’s ability to pay a bond’s principal and interest in a timely fashion will determine the bond’s coupon rate. The higher the grade, the lower the coupon.
Bond ratings are expressed as letters ranging from AAA to C. A triple-A rating is the most desirable, representing an investment grade bond with a minimal credit risk. To be considered investment grade, a corporate bond must be rated a BBB- (or Moody’s Baa3) or better. BB+ (or Moody’s Ba1) or below is considered below-investment grade. Each of the services uses the same basic grading system, with some variations in style. Here is a sampler:
|
Moody’s |
S&P |
Fitch |
Investment Grade/Ability to Meet Obligations |
|
Investment Grade |
|||
|
Aaa |
AAA |
AAA |
Highest quality, minimum credit risk |
|
Aa1 |
AA+ |
AA+ |
|
|
Aa2 |
AA |
AA |
High quality, low credit risk |
|
Aa3 |
AA- |
AA- |
|
|
A1 |
A+ |
A+ |
|
|
A2 |
A |
A |
Upper medium |