AA+ Vs. Aa1: What's the Difference?
AA+ and Aa1 are the second-highest ratings that can be assigned to debt by Standard & Poor's Financial Services (S&P) and Moody's Investors Service, respectively.
A bond's rating is the key indicator of the creditworthiness of the bond issuer, and therefore the degree of risk to the investor that the issuer could default on the debt.
AA+ and Aa1 ratings indicate high-quality investment-grade bonds. They signify that the issuer is financially sound and has adequate revenues and cash reserves to pay its debts. The risk of default for investors or policyholders is low.
- Investment-quality bonds are rated by S&P as AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, and BBB-.
- Moody's equivalent ratings, in descending order of quality, are Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, and Baa3.
- Any rating below these indicates a bond that is highly speculative or worse.
Those ratings are the second-best possible. The best ratings are AAA, from S&P, and Aaa, from Moody's. The only two American companies with debt rated AAA at this writing are Microsoft and Procter&Gamble. That is, their debt is judged to be safer from default than the U.S. government. U.S. Treasury issues were downgraded by S&P from AAA to AA+ in 2011.
The two companies are rating agencies that evaluate the quality of long-term bonds issued by corporations and governments and sold to investors. Fitch Ratings is the third of the "big three" U.S. rating agencies.
There is a range of acceptable designations for investment-grade bonds, sometimes designated as IG. The Fitch rating designations are identical to S&P's.
S&P has different rating designations for long-term and short-term bonds.
A bond's rating directly determines that amount of interest it will pay. The higher the rating, the lower the return.
S&P Long-Term Bond Ratings
S&P rates long-term debts from the highest possible AAA to the lowest rating of C. Anything rated below BBB- is not considered an investment-grade bond.
- The investment-quality bonds, in descending order of quality, are rated AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, and BBB-.
- The remaining B ratings are considered at best speculative and at worst highly speculative. They include BB+, BB, BB-, B+, B, and B-.
- Any rating of C is deemed extremely speculative or on the brink of default.
- A D rating means the company is in default.
S&P Short-Term Bond Ratings
The short-term bond rating system is relatively simple. Short-term bonds of investment quality are rated A1, A2, or A3, in descending order of quality. B or C rated short-term bonds are deemed speculative or worse.
Moody's rating system is similar to that of S&P.
- Long-term investment-quality bonds, in descending order of quality, are rated Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, and Baa3.
- All other letter B ratings indicate bonds that are not investment quality. They are Ba1, Ba2, Ba3, B1, B2, and B3.
- Any grade starting with the letter C has substantial risk, is extremely speculative, or is teetering on the edge of default.
Investment-grade short-term bonds are rated P1, P2, or P3.
For companies and governments seeking to borrow money, bond ratings are the equivalent of a consumer's credit rating.
The rating that a company's bond receives determines the rate of return it will pay on its bonds. Each successive step lower in the ratings listed above means a step up in the rate of return and in the degree of risk.
High-quality bonds have lower rates of interest. They are seen as safe-haven investments and are often bought by retirees seeking a steady income stream and by investors seeking to balance riskier investments like stocks with high-quality, low-risk bonds.
Low-quality bonds are often referred to as high-yield bonds. They pay better because they come with a greater risk that the issuer will default on their bond payments. The bond ratings call them non-investment-grade bonds. They're often referred to as junk bonds.