Ba1/BB+: Overview, How it Works, Functions

What Are Ba1/BB+?

Ba1/BB+ are rating designations by Moody's Investor Service and S&P Global Ratings, respectively, for a credit issue or an issuer of credit that signify higher degrees of default risk on the agencies' rating spectrums. Ba1/BB+ sits just below investment-grade ratings.

Moody's Investor Service and S&P Global Ratings assign ratings to bonds, preferred stock, and government entities. The ratings reflect the assessed risk of the security and how likely the borrower is to make interest payments.

How Ba1/BB+ Works

Bond investors seek to gauge the risk of a bond investment before making a purchase. The primary way that bond investors can understand the risk of a bond issued by a company, known as corporate debt, is to check the debt rating of the debt issuance and the corporation.

Three primary rating agencies are used by investors to ascertain the riskiness of an investment. These are Moody's, S&P, and Fitch. These rating agencies assign ratings that come with a pre-established definition as well as an analysis of the rating.

The Ba1/BB+ rating, as well as all others set by Moody's and S&P, have descriptive guidelines. Ratings apply to both the credit instrument that is issued and the issuer of the credit instrument. 

• Issue: For Moody's, an issue rated Ba1 is judged to be speculative and [is] subject to substantial credit risk. The modifier '1' indicates that the obligation ranks in the higher end of its generic rating category. For S&P, an issue rated BB+ is regarded as having significant speculative characteristics and while such obligations will likely have some quality and protective characteristics, these may be outweighed by significant uncertainties or major exposures to adverse conditions. The modifier '+' means it has a stronger relative standing among Ba-rated credit.
• Issuer: For Moody's, issuers assessed Ba1 are judged to be speculative and are subject to a substantial risk of defaulting on certain operating obligations and other contractual commitments. For S&P, an obligor rated BB[+] is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment.

The Function of Ratings

When a company wants to issue a bond to raise money for one of many purposes, usually to finance growth, it typically seeks out the services of the rating agencies to designate their credit opinions on the bond issue and on the issuer itself.

The ratings will assist in the price discovery process of the bond when it is marketed to investors. A Ba1/BB+ rating is below investment grade, or sometimes referred to as high-yield or junk; therefore, the yield on the bond should be higher than on an investment-grade security to compensate for the greater risk of payment default that the bond investor is taking on.

The issue and the issuer usually have the same rating, but they could be different if, for example, the issue is enhanced with additional credit protection for investors (the bond may have a higher rating), or if the structure of the issue is such that weaker credit protection exists, in which case the bond could be a Ba2/BB instead of Ba1/BB+.

The rating agencies also assign credit ratings to sovereign debt, assessing the default risk of a nation. The ratings of nations are impacted by their economic profile, their exchange rate, inflation, and their political climate. Investors considering investing in the government bonds of a specific nation can use these ratings to determine whether the outlook is stable in that country, which would strengthen its ability to make good on its debt obligations.