Credit Ratings are a good guide to the 'risk' involved in a financial security. While there has been controversy during the Global Financial Crisis about the value of these credit ratings, they are still a valuable tool to assess the 'quality' of an investment that you are looking at making.
There are three main credit rating firms. Each has their own methodology and they all use different rating systems. Therefore, when you are assessing an individual security, it is important that you understand WHO has rated the security, and WHAT the rating means.
It is also important to understand that the more letters of the same kind the higher ranking. For example a AA is higher than an A+. AAA- is higher than a BBB+.
Here are the websites for each of the main rating firms.
Standard & Poors website 14 01 SP_CreditRatingsGuide 20 pages
Moodys website 14 Moodys Rating Symbols and Definitions 46 pages
Fitch website 14 Fitch ratings definitions and scales 61 pages
For a quick reference to compare the different rating systems - here is a table courtesy of Wikipedia (with all the normal disqualifiers of accuracy and completeness)
| Moody's | S&P | Fitch | rating description | ||||
|---|---|---|---|---|---|---|---|
| Long-term | Short-term | Long-term | Short-term | Long-term | Short-term | ||
| Aaa | P-1 | AAA | A-1+ | AAA | F1+ | Prime | |
| Aa1 | AA+ | AA+ | High grade | ||||
| Aa2 | AA | AA | |||||
| Aa3 | AA- | AA- | |||||
| A1 | A+ | A-1 | A+ | F1 | Upper medium grade | ||
| A2 | A | A | |||||
| A3 | P-2 | A- | A-2 | A- | F2 | ||
| Baa1 | BBB+ | BBB+ | Lower medium grade | ||||
| Baa2 | P-3 | BBB | A-3 | BBB | F3 | ||
| Baa3 | BBB- | BBB- | |||||
| Ba1 | Not prime | BB+ | B | BB+ | B | Non-investment grade speculative | |
| Ba2 | BB | BB | |||||
| Ba3 | BB- | BB- | |||||
| B1 | B+ | B+ | Highly speculative | ||||
| B2 | B | B | |||||
| B3 | B- | B- | |||||
| Caa1 | CCC+ | C | CCC | C | Substantial risks | ||
| Caa2 | CCC | Extremely speculative | |||||
| Caa3 | CCC- | Default imminent with little prospect for recovery | |||||
| Ca | CC | ||||||
| C | |||||||
| C | D | / | DDD | / | In default | ||
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For more blog entries that you might be interested in:
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By Carey Church
