What is a Corporate Credit Rating
A corporate credit rating is an opinion of an independent agency regarding the likelihood that a corporation will fully meet its financial obligations as they come due. A company’s corporate credit rating indicates its relative ability to pay its creditors and gives investors an idea of how the company’s debt securities should be priced in term of yields. Corporate credit ratings are an opinion, not fact.
BREAKING DOWN Corporate Credit Rating
Corporate credit ratings are not a guarantee that a company will repay its obligations, but the overall, long-term track record of these ratings is indicative of the differences in creditworthiness among rated companies. In one study, for example, Standard & Poor’s found that “the average five-year default rate for investment-grade corporate issuers was 1.07%, compared with 16.03% for speculative-grade (junk-rated) companies.”
S&P, Moody’s and Fitch are the three main providers of corporate credit ratings. Each agency has its own ratings system that does not necessarily equate to another company’s ratings scale, but they are all similar. Fitch and Standard & Poor’s use AAA for the highest credit quality, AA for the next best, followed by A, then BBB for good credit. Everything below BBB is considered speculative or worse, down to a D rating, which indicates default.
Since the ratings are opinions, ratings of the same company can differ among rating agencies. Investment research firm Morningstar also provides corporate credit ratings that range from AAA for extremely low default risk to D for payment default.
Reliability of Corporate Credit Ratings
During the financial crisis of 2008, companies that had received glowing ratings from various credit rating agencies were downgraded to junk levels, calling into question the reliability of the ratings themselves. The main criticism that has plagued rating agencies is that they are not truly unbiased. In order to secure the job to conduct a rating, a rating agency will, according to the criticism, give the client a rating that it wants or sweep under the rug hairballs that would negatively impact a credit rating. Credit agencies came under intense fire, for good reason, when the post-mortem on the credit crisis was performed.