Credit rating

 

S&P's ratings of European countries (May 2012):

  AAA

  AA

  A

  BBB

  BB

  B

  CCC

  CC

  C

  Default

  no rating

World countries by Standard & Poor's Foreign Rating:

Green - AAA Turquoise - AA	Lighter blue - A Dark blue - BBB	Purple - BB Red - B
Grey - not rated

A credit rating evaluates the credit worthiness of a debtor, especially a business (company) or a government. It is an evaluation made by a credit rating agency of the debtor's ability to pay back the debt and the likelihood of default.

Credit ratings are determined by credit ratings agencies. The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts.

Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.

Sovereign credit ratings

Further information: List of countries by credit rating

A sovereign credit rating is the credit rating of a sovereign entity, i.e., a national government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad. It takes political risk into account

Country risk rankings (June 2012)

Least risky countries, Score out of 100

Source: Euromoney country risk

Rank	Previous	Country	Overall score
1	1	Norway	90.37
2	2	Switzerland	88.83
3	3	Singapore	88.03
4	4	Luxembourg	87.90
5	4	Sweden	86.79
6	5	Finland	84.30
7	7	Canada	84.26
8	8	Denmark	83.52
9	9	Netherlands	83.07
10	7	Germany	82.24

The table shows the ten least-risky countries for investment as of June 2012. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index monitors the political and economic stability of 185 sovereign countries. Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).

A. M. Best defines "country risk" as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations.

Short-term rating

A short-term rating is a probability factor of an individual going into default within a year. This is in contrast to long-term rating which is evaluated over a long timeframe. In the past institutional investors preferred to consider long-term ratings. Nowadays, short-term ratings are commonly used.^{[citation needed]}

First, the Basel II agreement requires banks to report their one-year probability if they applied internal-ratings-based approach for capital requirements. Second, many institutional investors can easily manage their credit/bond portfolios with derivatives on monthly or quarterly basis. Therefore, some rating agencies simply report short-term ratings.

Corporate credit ratings

Main article: Bond credit rating

The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, rather than the whole corporation. These are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond. The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.

A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S. The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS grades are mapped to one-year probability of default.

Moody's		S&P		Fitch
Long-term	Short-term	Long-term	Short-term	Long-term	Short-term
Aaa	P-1	AAA	A-1+	AAA	F1+	Prime
Aa1		AA+		AA+		High grade
Aa2		AA		AA
Aa3		AA-		AA-
A1		A+	A-1	A+	F1	Upper medium grade
A2		A		A
A3	P-2	A-	A-2	A-	F2
Baa1		BBB+		BBB+		Lower medium grade
Baa2	P-3	BBB	A-3	BBB	F3
Baa3		BBB-		BBB-
Ba1	Not prime	BB+	B	BB+	B	Non-investment grade speculative
Ba2		BB		BB
Ba3		BB-		BB-
B1		B+		B+		Highly speculative
B2		B		B
B3		B-		B-
Caa1		CCC+	C	CCC	C	Substantial risks
Caa2		CCC				Extremely speculative
Caa3		CCC-				In default with little prospect for recovery
Ca		CC
		C
C		D	/	DDD	/	In default
/				DD
/				D

Credit rating agencies

Main article: Credit rating agency

The largest credit rating agencies (which tend to operate worldwide) are Dun & Bradstreet, Moody's, Standard & Poor's and Fitch Ratings.

Other agencies include A. M. Best (U.S.), Baycorp Advantage (Australia), Egan-Jones Rating Company (U.S.), Global Credit Ratings Co. (South Africa),Levin and Goldstein(Zambia),Agusto & Co(Nigeria), Japan Credit Rating Agency, Ltd. (Japan). , Muros Ratings (Russia alternative rating agency), Rapid Ratings International (U.S.). and Credit Rating Information and Services Limited(Bangladesh)

See also

• List of countries by credit rating
• List of sovereign states by public debt
• Government budget by country
• List of countries by tax revenue as percentage of GDP

Individuals:

• Credit history
• Credit score

External links

Media related to Credit rating at Wikimedia Commons