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Credit Ratings (S&P)

Standard and Poor’s long term credit ratings are based, in varying degrees, on the following considerations:

  • Likelihood of payment – capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
  • Nature of and provisions of the obligation;
  • Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganisation, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior or subordinated obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and unsecured obligations, or operating company and holding company obligations.)
It is important for investors to understand that a credit rating is an opinion from the rating agency; it is not a guarantee of repayment. Investors use and rely on credit ratings in their selection of securities as the rating agency has completed the detailed credit analysis on behalf of investors. The issuers (borrowers) of debt pay the rating agencies to be rated.
 
The rating agencies evaluate the long-term credit quality of a company and its peers based on an analysis of two broad categories of risk – Business Risk and Financial Risk.
 
Credit ratings may change at any time. However, such changes are normally pre-signalled well in advance by the rating agencies with their “Outlook” (negative or positive) and “Credit Watch” (negative or positive) warnings in media releases.  
 
AAA
An obligation rated “AAA” has the highest rating assigned by Standard and Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
 
AA
An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
 
A
An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
 
BBB
An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Institutional investors such as pensions and superannuation funds generally invest in securities down to BBB, which is regarded as “investment grade”. Anything below the BBB level is not regarded as investment grade.
 
BB, B, CCC, CC, and C
Obligations rated “BB”, “B”, “CCC”, “CC”, and “C”, are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
 
BB
An obligation rated “BB” is les vulnerable to non-payment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
 
B
An obligation rated “B” is more vulnerable to non repayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.
 
CCC
An obligation rated “CCC” is currently vulnerable to non-payment, and is dependent upon favourable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
 
CC
An obligation rated “CC” is currently highly vulnerable to non-payment.
 
C
A subordinated debt or preferred stock obligation rated “C” is currently highly vulnerable to non-payment. The “C” rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A “C” also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
 
D
An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardised.
 
Plus (+) or minus (-)
The ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
 
* Some of the information set out above has been taken from the website of Standard and Poor’s – www.standardandpoors.com