Credit Ratings

This guide explains what credit ratings are, rating agencies that assign them, and what they mean.

What is Credit Risk?

Credit risk refers to the potential failure of a counterparty to return principal, interest, or other required payments to a creditor (lender, vendor, government, etc.). 

  • Common examples include:
    • potential for default of a corporation to repay its loan to a bank,
    • potential for consumer to fail to pay an invoice when due, or
    • potential for a government to default on its bonds.   

What are Credit Ratings?

A credit rating is an important metric which communicates credit risk to external parties. 

The chart below shows the credit rating scales of three major global rating agencies recognized by the US Securities and Exchange Commission: 

  • Fitch
  • Moody's 
  • Standard & Poor's  

Chart of Rating Agency Symbols and Definitions

The chart also highlights the important distinction between investment grade ratings (BBB- and above) and non-investment grade or speculative/junk status (BB+ and below).

Analysts use quantitative modeling and qualitative assessment tools to assign risk ratings, including assessment of:

  • macroeconomic environment
  • industry environment
  • business strategy and segments
  • management strength
  • financial ratios

How are Ratings Used?

Ratings impact business and financial markets:

  • Bond pricing and liquidity  
  • Account receivable and payables terms
  • Collateral requirements for derivative contracts 
  • Asset quality and solvency of financial institutions   

 

In this Standard & Poor's TV video, Timothy Poole, Director, Client Business Management, explains why Corporates use Standard & Poor's ratings and the process through which they obtain a rating.    

Adjunct Lecturer

Michele Costello's picture
Michele Costello
Contact:
Economics and Finance Department
Newman Vertical Campus
10th Floor
Baruch College
Box 10-225
55 Lexington Avenue
New York, NY 10010
646-312-3497