Thursday, September 6, 2007

Credit Ratings: Credit Scores Aren't Just For Consumers

Continuing on with the idea of debt from yesterday's blog about the debt ratio (click here to view), I'd like to talk a little about the Credit Ratings.

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 to illustrate the different ratings that are available:
Credit RiskMoody’s*Standard & Poor’s**Fitch Ratings**
Investment grade
Highest qualityAaaAAAAAA
High quality (very strong)AaAAAA
Upper medium grade (strong)AAA
Medium gradeBaaBBBBBB
Not investment grade
Lower medium grade (somewhat speculative)BaBBBB
Low grade (speculative)BBB
Poor quality (may default)CaaCCCCCC
Most speculativeCaCCCC
No interest being paid or bankruptcy petition filedCDC
In defaultCDD

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

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