Financial Statement Analysis Magazine Section

BOND RATINGS AND LONG TERM DEBT RATING SCALE

The Coveted Credit Club of AAA Rating:

AAA Bond RatingsIn 2016 just two companies, Microsoft and Johnson & Johnson, were left with AAA ratings,.
These two companies now enjoy a coveted rating of AAA which is higher than the U.S. government. The U.S. government was downgraded to AA+ in 2011.

The third was ExxonMobil that lost its AAA rating (was lowered to AA+) in April of 2016.


In 2001 there were 9 companies in the United States of America that receive the top triple-A rating. In the late seventies this number was 58 and in the nineties it was 22.
The nine companies were as follows:
1. American International Group
2. Berkshire Hathaway
3. Bristol-Myers Squibb
4. Exxon Mobil
5. General Electric
6. Johnson & Johnson
7. Merck
8. Pfizer
9. United Parcel Service

Then companies like IBM and Sears Roebuck lost this coveted status.

Other than an elite status a 'Triple-A' rating to an organization means reduced cost for borrowing. But nowadays companies prefer to leverage their debt against their equity and take on more debt to show an increase on their return on equity.

According to Moody's Investor Service only around 6% of the debt in the 2.6 trillion investment-grade corporate bond market carries the top rating. This is down from 10% in 1990 and 25% in 1979. The reason for this is perhaps competition and a greater willingness on behalf of organizations to take on more debt

The Rating Scale:

As is the case with all DBRS rating scales, long-term debt ratings are meant to give an indication of the risk that the borrower will not fulfill its full obligations in a timely manner, with respect to both interest and principal commitments. DBRS ratings do not take factors such as pricing or market risk into consideration and are expected to be used by purchasers as one part of their investment process. Every DBRS rating is based on quantitative and qualitative considerations, which are relevant for the borrowing entity.

AAA
Highest Credit Quality
AA
Superior Credit Quality
A
Satisfactory Credit Quality

BBB
Adequate Credit Quality
BB
Speculative
B
Highly Speculative

CCC
Very Highly Speculative
CC
Extremely Speculative
C
Extremely Speculative

D
In default of principal, interest, or both


"High" and "low" grades are used to indicate the relative standing of a credit within a particular rating category. The lack of one of these designations indicates a rating, which is essentially in the middle of the category. Note that "high" and "low" grades are not used for the AAA or D categories.

AAA
Bonds rated AAA are of the highest credit quality, with exceptionally strong protection for the timely repayment of principal and interest. Earnings are considered stable, the structure of the industry in which the entity operates is strong, and the outlook for future profitability is favourable. There are few qualifying factors present which would detract from the performance of the entity, the strength of liquidity and coverage ratios is unquestioned and the entity has established a creditable track record of superior performance. Given the extremely tough definition, which DBRS has established for this category, few entities are able to achieve a AAA rating.

AA
Bonds rated AA are of superior credit quality, and protection of interest and principal is considered high. In many cases, they differ from bonds rated AAA only to a small degree. Given the extremely tough definition, which DBRS has for the AAA category (which few companies are able to achieve), entities rated AA are also considered to be strong credits which typically exhibit above average strength in key areas of consideration and are unlikely to be significantly affected by reasonably foreseeable events.

A
Bonds rated A are of satisfactory credit quality. Protection of interest and principal is still substantial, but the degree of strength is less than with AA rated entities. While a respectable rating, entities in the A category are considered to be more susceptible to adverse economic conditions and have greater cyclical tendencies than higher rated companies.


BBB
Bonds rated BBB are of adequate credit quality. Protection of interest and principal is considered adequate, but the entity is more susceptible to adverse changes in financial and economic conditions, or there may be other adversities present which reduce the strength of the entity and its rated securities.

BB
Bonds rated BB are defined to be speculative, where the degree of protection afforded interest and principal is uncertain, particularly during periods of economic recession. Entities in the BB area typically have limited access to capital markets and additional liquidity support, and in many cases, small size or lack of competitive strength may be additional negative considerations.

B
Bonds rated B are highly speculative and there is a reasonably high level of uncertainty as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially in periods of economic recession or industry adversity.


CCC
Bonds rated CCC are very highly speculative. The degree of adverse elements present is more severe than bonds rated B. Bonds rated CCC often have characteristics which, if not remedied, may lead to default.

CC
Bonds rated CC are extremely speculative. These bonds are in danger of default of interest and/or principal. Bonds rated CC have characteristics, which, if not remedied, will lead to default.

C
Bonds rated C are extremely speculative and are in immediate danger of default. This is the lowest rating category provided to long term instruments that are not in default.


D
Bonds rated D are currently in default of interest, principal, or both.

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