Credit Rating

What’s a credit rating?
A grade or opinion from an agency that tells lenders about a corporation’s or country’s creditworthiness as a borrower, or the safety of a specific debt security offered by a corporation or country. Both corporations and countries borrow from investors by selling bonds and other securities, and corporations sometimes get loans from banks.

The better a corporation’s or country’s credit rating, the safer it appears to investors and lenders, and the less interest it needs to pay them. Countries are called sovereigns, so their credit ratings and debt are often referred to as sovereign credit ratings and sovereign debt.

An assessment of a person’s creditworthiness is usually called their credit score. Corporations and countries have credit ratings; people have credit scores.

Jason’s discussion
The best known credit rating agencies are A. M. Best, Dun & Bradstreet, Fitch, Moody’s, and Standard & Poor’s. They divide their ratings by duration: long-term debt and short-term debt. Then, they assign a letter grade similar to what you’ve seen on school report cards: A, B, C. Here’s S&P’s explanation of its long-term letter ratings in order from best to worst:

AAA — Extremely strong capacity to meet financial commitments. Highest Rating.
AA — Very strong capacity to meet financial commitments.
A — Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
BBB — Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
BBB- — Considered lowest investment grade by market participants.
BB+ — Considered highest speculative grade by market participants.
BB — Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
B — More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
CCC — Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
CC — Currently highly vulnerable.
C — Currently highly vulnerable obligations and other defined circumstances.
D — Payment default on financial commitments.

Ratings from AA to CCC are sometimes modified by a plus (+) or minus (-) sign to show relative standing within the major rating categories — again, just like school. An A+ is better than an A-. Here are S&P’s local long-term ratings for some corporations you know:

AAA — ExxonMobil
AA — Wal-Mart
A+ — Coca-Cola, IBM, Target
A — McDonald’s
BBB+ — Avon, Clorox, Heinz, Kellogg, Starbucks
BB+ — Whole Foods
B+ — Neiman Marcus, Wendy’s

On the same scale at S&P, here’s how some countries stack up:

AAA — Australia, Austria, Canada, Denmark, France, Germany, Singapore, Sweden, Switzerland, United Kingdom
AA+ — Belgium, United States of America, New Zealand
AA — Abu Dhabi, Bermuda, Spain
AA- — China, Japan, Saudi Arabia
A+ — Chile, Israel
B — Argentina, Fiji, Honduras
B- — Ecuador, Jamaica, Pakistan
CC — Greece

How to use credit rating at a cocktail party

“Can you believe America lost its triple-A rating, Barack?”

“Yes, I can. The country’s been spending like a drunken sailor for the past 30 years.”

“True,” you say, amazed at his lack of concern, “but losing that top rating for the first time in history was quite a blow. Wasn’t there anybody who could have stopped the crazy spending?”

“Like who?”

“I don’t know, somebody in power.”

“We could only hope. Another Bloody Mary for you?”

How credit rating shows up in the news

Credit rating agency Fitch says it is downgrading several credit ratings for pharmaceutical giant Pfizer Inc. ahead of the loss of patent protection for its best-selling drug, Lipitor.

Fitch downgraded Pfizer’s long-term issue default rating to ‘A+’ from ‘AA-‘ in anticipation of revenue pressures as the company continues to pay off its 2009 acquisition of Wyeth.

- Washington Post

Lawmakers, regulators, and investors have trained their cross hairs on S&P and its peers for assigning rosy ratings to thousands of complex securities that were later downgraded within the span of a few months, deepening the [subprime mortgage] crisis. …

S&P originally assigned its highest rating to the deal based on “dummy,” or hypothetical, assets, then maintained that triple-A rating even though bankers had replaced them with lower-quality assets that didn’t meet the firm’s ratings standards, according to emails among S&P analysts that were disclosed in congressional testimony.

- The Wall Street Journal

The United States lost its top-tier AAA credit rating from Standard & Poor’s on Friday in an unprecedented blow to the world’s largest economy in the wake of a political battle that took the country to the brink of default.

S&P cut the long-term US credit rating by one notch to AA-plus on concerns about the government’s budget deficit and rising debt burden. The action is likely to eventually raise borrowing costs for the American government, companies, and consumers. … The move reflects the deterioration in the global economic standing of the United States, which has had a AAA credit rating from S&P since 1941, and it could have implications for the US dollar’s reserve currency status.

- Reuters






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