AA+/Aa1 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. AA+/Aa1 is the second highest rating a debt issuer can receive. It is eight rankings above the cutoff that separates investment grade debt from high-yield, or non-investment grade debt. The AA+/Aa1 rating signifies that the issuer or carrier has strong financial backing and cash reserves. The risk of default for investors or policyholders is low.
Breaking Down AA+/Aa1
AA+/Aa1 is a credit rating second from the top 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 AA+/Aa1 Rating
For example, ABC Inc. is a company that is looking to raise capital by issuing long-term debt. They are a company that produces an extremely popular consumer product in an industry with high barriers to entry, and they take up a significant portion of the market share. They have plentiful free cash flow, and their balance sheet fundamentals are strong. They have an excellent record of servicing their debt. Moody's and S&P ranked the debt an AA+/Aa1.