Consider this: Most intelligent consumers understand that their credit score determines whether they can purchase a home, get a job, or secure a loan. Those with poor scores are expected to have more difficulty paying back their credit cards, and as such have to pay higher interest payments to compensate the company for the risk. Credit ratings for companies are very similar to an individual's credit score.
Credit ratings are typically given by analysts from credit rating agencies such as Moody's or S&P. These ratings are used by banks to help determine the liklihood that a company might default on its payments. These rating are also used as a guide for fund managers who are not allowed to invest in the bonds of businesses with poor ratings.
Here is a table I borrowed from www.investinginbonds.com to illustrate the different ratings that are available:
| Credit Risk | Moody’s* | Standard & Poor’s** | Fitch Ratings** |
|---|---|---|---|
| Investment grade | |||
| Highest quality | Aaa | AAA | AAA |
| High quality (very strong) | Aa | AA | AA |
| Upper medium grade (strong) | A | A | A |
| Medium grade | Baa | BBB | BBB |
| Not investment grade | |||
| Lower medium grade (somewhat speculative) | Ba | BB | BB |
| Low grade (speculative) | B | B | B |
| Poor quality (may default) | Caa | CCC | CCC |
| Most speculative | Ca | CC | CC |
| No interest being paid or bankruptcy petition filed | C | D | C |
| In default | C | D | D |
These ratings in conjunction with the Debt Ratio can give an investor a better handle on how much debt potential investments are carrying. I hope this post has been helpful.
----Sincerely, Trevor Stasik
Credit Scores, Credit Ratings, Analyst, Moodys S and P, Fitch
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