DEFINITION of A-/A3
A-/A3 are ratings issued to long-term bond issuers by Moody's and S&P, respectively. The rating of the issuer designates the creditworthiness of the issuer. A-/A3 is the seventh highest rating a debt issuer can receive. It is four rankings above the cutoff that separates investment grade debt from high-yield, or non-investment grade debt. The A-/A3 rating signifies that the issuer or carrier has mostly financial backing and some cash reserves. The risk of default for investors or policyholders is somewhat low.
BREAKING DOWN A-/A3
A-/A3 is a credit rating in the middle of the investment grade credit ranking system. The rankings for Moody's and S&P from highest to lowest in the investment grade category are Aaa/AAA, Aa1/AA+, Aa2/AA, Aa3/AA-, A1/A+, A2/A, A3/A-, Baa1/BBB+, Baa2/BBB and Baa3/BBB-. The ratings assigned by the various ratings agencies are based primarily upon the insurer's or issuer's creditworthiness. This rating can, therefore, be interpreted as a direct measure of the probability of default. However, credit stability and priority of payment are also factored into the rating.
Example of an A-/A3 Rating
For example, XYZ Corp is a company that is looking to raise capital by issuing long-term debt. They are a company that produces a consumer product that used to be popular, but has lost market share recently and the company's revenues have been shrinking. They are experiencing reduced free cash flow and their balance sheet fundamentals are weakening. However, they still have a great record of servicing their debt. Moody's and S&P ranked the debt an A-/A3.