A bond rating represents the grade assigned to a company to show its credit quality. Independent rating agencies offer an assessment of credit issuers’ fiscal strength and their capacity to cater to a bond’s principal, in addition to its interests, timely (Almeida, Cunha, Ferreira, & Restrepo, 2017). The main rating agencies in the US include Standard and Poor’s, Fitch’s, and Moody’s. Standard and Poor’s expresses bond ratings in terms of letters that range from AAA, the highest rate, to C or D (referred to as junk), the lowest possible level. Different rating agencies have been found to use similar letter designations but with varied arrangements of lower and upper-case letters, which is the factor that differentiates them.
Some of the major aspects that make corporations experience changes in their credit ratings include the worsening of financial situations, high debt rates, inflation, and a company’s sales level. Deterioration of the financial situation signifies that companies might be unable to service their debts according to the given period, or in some instances, end up defaulting (Oikonomou, Brooks, & Pavelin, 2014). Characteristically, the lack of improvement in the cash flows of a business that has huge debts has been found to result in the downgrading of its credit rating. There is a strong relationship between a company’s credit rating and the merit of investment in its bonds. A credit rating acts as the report card that helps investors to find out a corporation’s credit risk. Successful companies, which are considered safer to invest in, have high credit ratings, unlike risky companies on the verge of collapsing. Nevertheless, investors are not supposed to depend merely on the credit rating but ought to supplement it with their own research, for example, often reviewing ratings in the course of the life of a bond.
References
Almeida, H., Cunha, I., Ferreira, M. A., & Restrepo, F. (2017). The real effects of credit ratings: The sovereign ceiling channel. The Journal of Finance, 72(1), 249-290. Web.
Oikonomou, I., Brooks, C., & Pavelin, S. (2014). The effects of corporate social performance on the cost of corporate debt and credit ratings. Financial Review, 49(1), 49-75. Web.