Corporate Credit Ratings
Corporate Credit Ratings
The aim of corporate credit ratings is to measure the credit worthiness of corporations. Rather than estimating the overall health of a company, these ratings are an indication of how likely a corporation is to pay back it’s loans; such as bonds. There are three main credit rating agencies (the term given to credit bureau which deals with corporations), they are as follows:
Corporate Credit Rating Agencies
These three companies control over 90% of the corp. credit rating market, with two smaller rating agencies (Dun & Bradstreet (D&B) and A.M Best) controlling the other ten percentage. These agencies assign companies with a letter rating such as A, B or C with A being the most likely to pay it’s debt and C being the least likely to pay it’s debt. Below is a more complete listing of what each of these letter ratings mean:
Corporate Credit Ratings Scale
| oody’s | Standard & Poor’s (S&P) | Fitch | Credit Worthiness/What This Means |
|---|---|---|---|
| Aaa | AAA | AAA | This corporation has an extremely strong capacity to meet it’s debt & financial commitments. There are currently four companies which are AAA according to S&P, they are; Automatic Data Processing (NYSE:ADP), Johnson & Johnson (NYSE:JNJ), Microsoft (NASDAQ:MSFT) and ExxonMobil (NYSE:XOM). Source. |
| Aa1 | AA+ | AA+ | This corporation has a very strong capacity to meet it’s debt and financial commitments. The difference between this an a triple A rating are small. |
| Aa2 | AA | AA | |
| Aa3 | AA- | AA- | |
| A1 | A+ | A+ | This corporation has a strong capacity to meet it’s debt and financial commitments but it more susceptible to big changes in economic conditions and other adverse situations. |
| A2 | A | A | |
| A3 | A- | A- | |
| Baa1 | BBB+ | BBB+ | This corporation has an adequate capacity to meet it’s debt and financial commitments but changing conditions and circumstances are likely to lead to a weaken capacity to meet these commitments. |
| Baa2 | BBB | BBB | |
| Baa3 | BBB- | BBB- | |
| Ba1 | BB+ | BB+ | This corporation faces major ongoing uncertainties and exposure to adverse economic financial or business conditions could lead to an inability to meet it’s debt and financial commitments. . None the less this corporation is less vulnerable at least in the near term than other lower rated corporations. |
| Ba2 | BB | BB | |
| Ba3 | BB- | BB- | |
| B1 | B+ | B+ | This corporation currently has the capacity to meet it’s debt and financial commitments but adverse economic, financial or business conditions could lead to an inability to meet these commitments. It is more vulnerable than corporations rated BB or above. |
| B2 | B | B | |
| B3 | B- | B- | |
| Caa | CCC | CCC | This corporation is dependent on favourable economic, financial and business conditions to be able to meet it’s debt and financial commitments, it’s currently vulnerable. |
| Ca | CC | C | This corporation is currently highly vulnerable and if significant favourable economic financial business conditions do not occur it will be unable to meet it’s debt and financial commitments. |
| C | C | This corporation is highly likely to provide non-paymentfor it’s debt and financial obligations. This is often used when a bankruptcy petition has been filed. | |
| C | D | D | This corporation has failed to pay one or more of it’s debt or financial obligations when it was due. |
| e, p | pr | Expected | Preliminary ratings may be assigned to obligations pending receipt of final documentation and legal opinions. The final rating may differ from the preliminary rating. |
| WR | Rating withdrawn for reasons including: debt maturity, calls, puts, conversions, etc., or business reasons (e.g. change in the size of a debt issue), or the issuer defaults. | ||
| unsolicited | unsolicited | This rating was initiated by the ratings agency and not requested by the issuer. | |
| SD | RD | This rating is assigned when the agency believes that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. | |
| NR | NR | NR | No rating has been requested, or there is insufficient information on which to base a rating. |
These ratings can also be modified with either a + (plus) or – (minus). These are intermediate ratings that are often given when there is uncertainty with a corporation or the market that corporation deals in. These ratings usually indicate that the letter rating a company has is likely to change unless business significantly improves (or decreases in the case of a + sign). These intermediate ratings are also referred to as credit watches.
For example let’s say that Microsoft has a triple A rating (which it does), but due to market uncertainty the likelihood of them paying back all it’s creditors has slightly decrease. Standard and Poors may put Microsoft on a credit watch and change their intermediate credit rating to an AA+. If this market uncertainty continues they may downgrade Microsoft to a double A rating. Please note this is an example only and does not depict current events.
There are currently four companies which hold triple A ratings with Standard & Poors, they are as follows:
- Automatic Data Processing (NYSE:ADP)
- Johnson & Johnson (NYSE:JNJ)
- Microsoft (NASDAQ:MSFT)
- ExxonMobil (NYSE:XOM)
Criticism Of Corporate Credit Ratings
In recent years there has been increasing criticism of the way corporate credit ratings are handled and companies who issue them. Some of this has stemmed from the credit crash in mid to late 2000′s where these companies had high risk sub prime mortgages rated at triple A levels.
Executives from the credit rating agencies also testified in front of congress stating that their credit ratings are merely opinions and not facts and should be treated as such.