A is an evaluation of the credit worthiness of a debtor, especially a business (company) or a government, but not individual consumers. The evaluation is made by a of the debtor's ability to pay back the and the likelihood of .[3] Evaluations of individuals' credit worthiness are known as credit reporting and done by credit bureaus, or consumer credit reporting agencies, which issue credit scores.

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.[citation needed] 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.[citation needed] 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 obligations.

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

Contents [hide]

 1 Sovereign credit ratings  2 Short-term rating  3 Corporate credit ratings  4 Credit rating agencies  5 See also  6 References

Sovereign credit ratings[edit] 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.

Source: Euromoney country risk

Country risk rankings (January 2013)[4][5]

Least risky countries, Score out of 100 Previous Country Overall score

Rank 1 1 Norway 89.87

2 3 Luxembourg 87.29

3 4 Singapore 86.81

4 5 Sweden 86.81

5 2 Switzerland 86.78

6 6 Finland 84.54

7 7 Denmark 82.64

8 9 Hong Kong 82.43

9 8 Netherlands 81.82

10 8 Canada 81.82

The "Country risk rankings" table shows the ten least-risky countries for investment as of January 2013. Ratings are further broken down into components including political risk, economic risk. Euromoney's bi-annual country risk index[6] 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"[7] as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations.

Short-term rating[edit]

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 rose 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[edit] Main article: Bond credit rating

Credit ratings that concern corporations are usually of a corporation's financial instruments i.e. debt such as a bond, but corporations themselves are also sometimes rated. Ratings are assigned by credit rating agencies, the largest of which are Standard & Poor's, Moody's and . They use letter designations such as A, B, C. Higher grades are intended to represent a lower .

Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues ..." (Standard and Poors' definition of a AAA rated and a BB rated bond respectively).[8] However, some studies have estimated the average risk and reward of bonds by rating. One study by a rating service (Moody's)[9][10] claimed that over a "5-year time horizon" bonds it gave its highest rating (Aaa) to had a "cumulative default rate" of just 0.18%, the next highest (Aa2) 0.28%, the next (Baa2) 2.11%, 8.82% for the next (Ba2), and 31.24% for the lowest it studied (B2). (See "Default rate" in "Estimated spreads and default rates by rating grade" table to right.) Over a longer time horizon it stated "the order is by and large, but not exactly, preserved".[11]

Estimated spreads and default rates by rating grade

Basis Point Default Rating spread rate[9][10] [12][13][14]

AAA/Aaa 43 0.18%

AA/Aa2 73 0.28%

A 99 n/a BBB/Baa2 166 2.11%

BB/Ba2 299 8.82%

B/B2 404 31.24%

CCC 724 n/a

Sources: Basis spread from

Federal Reserve Bank of

New York Quarterly Review,

Summer-Fall 1994";

Default rate from study by Moody's investment service

Another study in Journal of Finance calculated the additional interest rate or "spread" corporate bonds pay over that of "riskless" US Treasury bonds, according to the bonds rating. (See "Basis point spread" in table to right.) Looking at rated bonds from 1973–89, the authors found a AAA rated bond paid only 43 "basis points" (or 43/100th of a percentage point) over a Treasury bond (so that it would yield 3.43% if the Treasury yielded 3.00%). A CCC-rated "junk" (or speculative) bond on the other hand, paid over 4% (404 basis points) more than a Treasury on average over that period.[12][13]

Different rating agencies may use variations of an alphabetical combination of lower and upper case letters, with either plus or minus signs or numbers added to further fine tune the rating (see colored chart). The Standard & Poor's rating scale uses upper case letters and pluses and minuses.[15] The Moody's rating system uses numbers and lower case letters as well as upper case.

While Moody's, S&P and Fitch Ratings controlling approximately 95% of the credit ratings business,[16] they are not the only rating agencies. DBRS's long-term ratings scale is somewhat similar to Standard & Poor's and Fitch Ratings with the words high and low replacing the + and −. It goes as follows, from excellent to poor: AAA, AA(high), AA, AA(low), A(high), A, A(low), BBB(high), BBB, BBB(low), BB(high), BB, BB(low), B(high), B, B(low), CCC(high), CCC, CCC(low), CC(high), CC, CC(low), C(high), C, C(low) and D. The short-term ratings often maps to long-term ratings though there is room for exceptions at the high or low side of each equivalent.[17] S&P, Moody's, Fitch and DBRS are the only four ratings agencies that are recognized by the European Central Bank for the purposes of determining collateral requirements for banks to borrow from the central bank. The ECB uses a first, best rule among the four agencies that have the designated ECAI status.[18] That means that it takes the highest rating among the four - S&P, Moody's, Fitch and DBRS - to determine haircutsand collateral requirements for borrowing. Ratings in Europe have been under close scrutiny, particularly the highest ratings given to countries like Spain, Ireland and Italy because it affects how much banks can borrow against sovereign debt they hold.[19]

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

rating description Long- Short- Long- Short- Long- Short- term term term term term term

Aaa AAA AAA Prime

Aa1 AA+ AA+

A-1+ F1+

Aa2 AA AA High grade

P-1

Aa3 AA− AA−

A1 A+ A+

A-1 F1

A2 A A Upper medium grade

A3 A− A−

P-2 A-2 F2

Baa1 BBB+ BBB+ Lower medium grade

Baa2 BBB BBB

P-3 A-3 F3

Baa3 BBB− BBB−

Ba1 BB+ BB+

Non-investment grade Ba2 BB BB speculative

Ba3 BB− BB−

B B

B1 B+ B+

B2 B B Highly speculative

B3 B− B−

Caa1 Not prime CCC+ Substantial risks

Caa2 CCC Extremely speculative

Caa3 CCC− C CCC C

Default imminent with CC little prospect for recovery Ca

C

C DDD

D / / In default

/ DD

/ D

Credit rating agencies[edit] Main article: Credit rating agency

In addition to "the Big Three" of Moody's, Standard & Poor's, and Fitch Ratings, other agencies and rating companies include (in alphabetical order):

Agusto & Co. (Nigeria), A. M. Best (U.S.), China Chengxin Credit Rating Group (China), Credit Rating Information and Services Limited[20][21] (Bangladesh), CTRISKS (Hong Kong),[22] Dagong Europe Credit Rating (Italy), DBRS (Canada), Dun & Bradstreet (U.S.), Egan-Jones Rating Company (U.S.), Global Credit Ratings Co. (South Africa), HR Ratings (Mexico), ICRA Limited (India), Japan Credit Rating Agency[23] (Japan), Levin and Goldstein (Zambia), Morningstar, Inc. (U.S.), Muros Ratings[24] (Russia, alternative rating company), Public Sector Credit Solutions[25] (U.S., not-for profit rating provider), Rapid Ratings International[26] (U.S.), Veda (Australia, previously known as Baycorp Advantage), Wikirating (Switzerland, alternative rating organization), Humphreys Ltd (Chile, previously known as Moody´s Partner in Chile).