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| home > acquisition strategy > library > S&P Rating Definitions |
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| S&P Rating Definitions |
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An S&P corporate or municipal debt rating is a current assessment of the credit worthiness of an obligor
with respect to a specific obligation. This assessment may take into consideration obligors such
as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security, as it does not comment
on market price to suitability for a particular investor.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default. The rating assesses the obligor's capacity and willingness as to timely
payment of interest and repayment of principal in accordance with the terms of the obligation.
2. The obligation's nature and provisions.
3. Protection afforded to, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under bankruptcy laws and other laws
affecting creditors' rights.
Likelihood of default is indicated by an issuer's senior debt rating. If senior debt is not rated,
an implied senior debt rating is determined. Subordinated debt usually is rated lower than senior
debt to better reflect relative position to the obligation in bankruptcy. Unsecured debt,
where significant secured debt exists, is treated similarly to subordinated debt.
Long-term rating definitions
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay interest and
repay principal is extremely strong.
AA
Debt rated 'AA' has a very strong capacity to pay interest and repay principal and differs
from the highest rated debt only in small degree.
A
Debt rated 'A' has a strong capacity to pay interest and repay principal, although
it is somewhat more susceptible to adverse effects of changes in circumstances and economic conditions
than debt in higher rated categories.
BBB
Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. It normally exhibits adequate protection parameters, but adverse economic
conditions or changing circumstances are more likely to lead to weakened capacity to pay.
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. 'BB' indicates the least degree of speculation
and 'C' the highest degree of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.
BB
Debt rated 'BB' has less near-term vulnerability to default than other speculative-grade debt.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to inadequate capacity or meet timely interest and principal payments.
B
Debt rated 'B' has greater vulnerability to default but presently has the capacity to
meet interest payments and principal repayments. Adverse business, financial, or economic
conditions would likely impair capacity or willingness to pay interest and repay principal.
CCC
Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent on favorable business, financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and repay principal.
CC
The rating 'CC' is typically applied to debt subordinated to senior debt which is
assigned an actual or implied 'CCC-' rating.
C
The rating 'C' is typically applied to debt subordinated to senior debt, which is
assigned an actual or implied 'CCC' rating.
D
Debt is rated 'D' when the issue is in payment default, or the obligor has filed
for bankruptcy. The 'D' rating is used when interest or principal payments are not made on
the date due, even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period.
r
This symbol is attached to the ratings of instrument with significant noncredit risks.
It highlights the volatility in expected returns that could result from the terms of the instrument -
which is not addressed in S&P credit rating. Examples include: obligations indexed or
linked to equities, currencies or commodities; obligations exposed to severe prepayment risk,
such as interest-only and principal-only mortgage securities; and obligations that have
unusually risky terms, such as leveraged inverse floaters.
Plus (+) or minus (-):
The ratings from 'AA' to 'CCC' may be modified by the addition
of a plus or minus sing to show relative standing within the major rating categories.
If an issuer's actual or implied senior debt rating is 'AAA', its subordinated or junior debt is
rated 'AAA' or 'AA+'. If an issuer's actual or implied senior debt rating is lower than 'AAA' but
higher than 'BB+', its junior debt is typically rated one designation lower than the senior debt
rating. For example, if the senior debt rating is 'A', subordinated debt normally would be rated 'A-'.
If an issuer's actual or implied senior debt rating is 'BB+' or lower, its subordinated debt is
typically rated two designations lower than the senior debt rating.
Investment and speculative grads
The term "investment grade" was originally used by various regulatory bodies to connote
obligations eligible for investment by institutions such as banks, insurance companies, and
savings and loan associations. Over time, this term gained widespread usage throughout the
investment community. Issues rated in the four highest categories, 'AAA', 'AA', 'A', 'BBB',
generally are recognized as being investment grade. Debt rated 'BB' or below generally is
referred to as speculative grade. The term Òjunk bondÓ is merely a more irreverent expression
for this category of more risky debt. Neither term indicated which securities S&P deems
worthy of investment, as an investor with a particular risk preference may appropriately
invest in securities that are not investment grade.
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