Definition of credit rating

Also called debt rating, this is a method of measuring the creditworthiness of a debt issuer. The ratings provided by the main credit rating agencies, Moody's Investors Service, Standard & Poor's (S&P) and Fitch, evaluate issuers worldwide and are very closely followed. A top rating means there is almost no likelihood of the borrower failing to meet interest payments or full redemption of the issue. [1]

Credit ratings are opinions expressed on an alphanumeric scale on the relative ability and willingness of a debt issuer to meet financial commitments.

Credit ratings published by the main global rating agencies aim to provide ratings that are objective and transparent, as well as consistent and comparable across instruments, maturities, industries and countries. Some sectors, maturities and countries have their own specific rating scales.

The long-term global rating scale at S&P and Fitch contain nine grades and goes from the highest grade to the lowest grade (in increasing order of riskiness): AAA, AA, A, BBB, BB, B, CCC, CC, C.

For Moody's, the scale contains nine grades and goes from the highest grade to the lowest grade (in increasing order of riskiness): Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C.

All three global credit rating agencies, for each full grade other than AAA (or Aaa), CC (or Ca), or C, include a positive, neutral or negative modifier for Fitch and S&P or a numerical modifier for Moody’s. This brings the nine point rating scale to a 21 point scale. For instance, for the AA grade there are AA+, AA, AA- or Aa1, Aa2, Aa3. [2]

Example

Government credit ratings take into account three main elements. These are public debt as a percentage of gross domestic product, the budget deficit (the amount government spending exceeds income) and debt affordability (interest costs as a percentage of revenue).

In 2011, Germany with a triple A rating, has a debt-to-GDP ratio of 73 per cent, a deficit of 3 per cent and a debt affordability ratio of 5 per cent. B plus rated Greece has debt-to-GDP at 127 per cent, a deficit of 15 per cent and debt affordability on 15 per cent. [3]