Bond rating agencies are companies that assess the creditworthiness of both debt securities and their issuers. Credit rating agencies publish the ratings and used by investment professionals to assess the likelihood that the debt will be repaid.
Breaking Down Bond Rating Agencies
In the United States, the three primary bond rating agencies are Standard and Poor's Global Ratings, Moody's Investors Service, and Fitch Ratings. Each uses a unique letter-based rating system to quickly convey to investors whether a bond carries a low or high default risk and whether the issuer is financially stable. For example, Standard and Poor's highest rating is AAA - once a bond falls to BB+ status, it is no longer considered investment grade. The lowest rating, D, indicates that the bond is in default, that is, the issuer is delinquent in making interest payments and principal repayments to its bondholders. In general, Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, with WR and NR as withdrawn and not rated, respectively. Standard & Poor's and Fitch assign bond credit ratings of AAA, AA, A, BBB, BB, B, CCC, CC, C, and D, with the latter denoting a bond issuer in default.
Bonds are rated at the time they are issued, and both bonds and their issuers are periodically reevaluated to see if a ratings change is warranted. Bond ratings are important not only for their role in informing investors, but also because they affect the interest rate that companies and government agencies pay on their issued bonds.
Since the 2008 financial crisis, ratings agencies have been criticized for not identifying all of the risks that could impact a security's creditworthiness, particularly regarding Mortgage-Backed Securities (MBS) that received high credit ratings but turned out to be high-risk investments. Investors are also concerned about a possible conflict of interest between the rating agencies and the bond issuers since the issuers pay the agencies for the service of providing ratings. Because of these and other shortcomings, ratings should not be the only factor investors rely on when assessing the risk of a particular bond investment.
The top three bond rating agencies are private firms that rate corporate and municipal bonds based on the associated degree of risk, and sell the ratings for publication in the financial press and daily newspapers. Other bond rating agencies in the United States include Kroll Bond Rating Agency (KBRA), Dun & Bradstreet Corporation, and Egan-Jones Ratings (EJR) Company.