A- / A3: Definition, Bond Ratings Scale, Example

What Is A-/A3?

A-/A3 are a pair of rating categories issued by two different rating agencies, Moody's and S&P, to reflect long-term investment grade bond creditworthiness. Both A- and A3 represent medium-level investment grade credit ratings for a debt issuer or a debt instrument.

Key Takeaways

  • A-/A3 are medium investment grade credit ratings offered by Moody's and Standard & Poor's.
  • Both ratings signify that the issuer has financial backing and some cash reserves with a low risk of default.
  • A-/A3 is the seventh-highest rating a debt issuer can receive and is four rankings above the cutoff for junk bonds.

Understanding A-/A3

The credit ratings assigned by the various rating agencies are based primarily upon the insurer's or issuer's creditworthiness; in a sense, they are a quantified assessment of the creditworthiness of a borrower. A- and A3, like all ratings, can be interpreted as a direct measure of the probability of default. However, credit stability and priority of payment are also factored into the rating.

A-/A3 ratings are 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.

Investment grade ratings
Aa1 AA +
Aa2 AA
Aa3 AA -
A1 A +
A2 A
A3 A -
Baa1 BBB +
Baa2 BBB
Baa3 BBB -

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-.

Example of an A-/A3 Rating

XYZ Corp is looking to raise capital by issuing long-term debt. It produces a consumer product that used to be popular but has lost market share recently, and the company's revenues have been shrinking.

XYZ is experiencing reduced free cash flow and its balance sheet fundamentals are weakening. However, the company still has a great record of servicing its debt. As a result, Moody's and S&P rank XYZ's debt an A-/A3.

Special Considerations: Credit Downgrades

Investors should be aware that an agency downgrade of a company's bonds from "BBB" to "BB" reclassifies its debt from investment grade to "junk" status. Although this is merely a one-step drop in credit rating, the repercussions can be severe.

The drop to junk status telegraphs that a company may struggle to pay its debts. The downgraded status can make it even more difficult for companies to source financing options, causing a downward spiral as costs of capital increase.