What Are Bonds Credit Ratings?

By: Court Tuttle

According to Wikipedia the credit rating assesses the credit worthiness of a corporation. It is analogous to credit ratings for individuals and countries. The credit rating is a financial indicator to potential investors of debt securities such as bonds. These are assigned by credit rating agencies, such as Standard & Poors and have letter designations such as AAA, B, CC.

There are five corporations in the United States that are watched over by the SEC with their credit ratings. There is Fitch, A.M. Best, Dominion Bond Rating Service, Standard & Poor and Moodys. Out of all of the agencies Moodys, Standard & Poors and Fitch are the largest in the market.

Each assigns a different bond credit ratings. For example: Moodys credit ratings are Aaa, Aa, A, Baa, Ba, B, Caa, Ca, and C. The other credit agencies such as Fitch and Standard & Poors bond credit ratings are AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. Each company can also assign intermediate rating such as BBB+- etc.

According to Wikipedia as of 2005, there are only nine companies rated AAA by all three major bond credit agencies: 1. Automatic Data Processing 2. Berkshire Hathaway 3. Exxon Mobile 4. General Electric 5. Johnson and Johnson 6. Pfizer 7. Toyota Motor Corporation 8. United Parcel Service 9. Northwestern Mutual Financial Network.

When reviewing these credit ratings from the credit agencies you have to be careful and keep a few things in mind. Out of the three biggest rating agencies Standard & Poors, Moodys, and Fitch have a lot of market push. For example there was a report made on Moodys credit rating for Hannover, which is a large German Insurance Company, which was written by Alec Klein of the Washington Post on Nov 22.

Hannover had been rated by two other rating agencies and did not want to pay for Moodys rating. Moody still rated the company as an unsolicited rating. While the other raters gave Hannover good ratings Moodys rating was bad and caused the selling of Hannovers shares which lost them $175 million dollars that day in market share.

So even though Hannover received two good rating from the other companies, the rating from Moodys held more weight by the investors than the others. The problem with this scenario is that an unsolicited rating does not provide anything more to what you already know about the company, because the credit rating agency got their information from public sources.

The companies that have more ratings then others do not mean that they have more credit. The purpose of these ratings is to give the investor a different view of the company. For instance S&Ps rating may be different from Fitchs rating and Fitch does not necessarily take precedence over the other.

Also, the ratings depend largely on the company being ethical with its investments such as Enron and WorldCom. Even though they had access to these companies and gave positive ratings the companies were not honest which lost the investors their money.

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