What the Ratings Mean (Moody's, Standard & Poors)

BOND RATINGS – What the Grades Mean

When considering a potential investment, investors should compare the credit qualities of available corporate bond issues before they invest. The two most recognized rating agencies that assign credit ratings to corporate bond issuers are Moody's Investors Service (“Moody’s”) and Standard & Poor's Corporation (“S&P”).

In determining the creditworthiness of an issuer, Moody's and S&P focus on a company's overall financial condition as well as that of the industry in which the issuer operates. A rating represents the opinions of the rating agency at a particular point in time. Ratings on individual issues are continuously revised to reflect any industry or company developments, and these ratings changes can have a distinct effect on an issue's market price. Moody's and S&P classify corporate bond issues as either "investment grade" or "below investment grade”, briefly summarized below:

Investment grade bonds are generally more appropriate for conservative clients. These bonds typically provide the highest degree of principal and interest payment protection, and they are generally the least likely to default.

Below investment grade bonds may be suitable for more aggressive clients willing to accept greater degrees of credit risk in exchange for significantly higher yields.




Investment Grade Moody's S&P


Highest Grade: Aaa AAA
Moody's These bonds are judged to be of the best quality. They carry the smallest degree of risk. Interest payments are protected by an exceptionally stable margin and principal is secure.
S&P The issuer’s capacity to meet its financial obligation on the bond is extremely strong.


High Grade: Aa1, Aa2, Aa3 AA+, AA, AA-
Moody's These bonds are judged to be of high quality by all standards. Margins of protection may not be as large as in Aaa securities.
S&P The issuer’s capacity to meet its financial obligation on the bond is very strong.


Upper Medium Grade: A1, A2, A3 A+, A, A-
Moody's These bonds possess many favorable investment attributes. Factors giving security to principal and interest are considered adequate.
S&P Although these bonds are somewhat more susceptible to the adverse effects of changing economic conditions, the issuer’s capacity to meet its financial obligations is strong.


Medium Grade: Baa1, Baa2, Baa3 BBB+, BBB, BBB-
Moody's The bonds lack outstanding investment characteristics and have speculative characteristics as well.
S&P Adverse economic conditions are more likely to lead to a weakened capacity of the issuer to meet its financial commitment.


Below Investment Grade Moody's S&P


Speculative Grades: Ba1, Ba2, Ba3 BB+, BB, BB-
Moody's The future of these bonds cannot be considered as well-assured. B1, B2, B3 B+, B, B-
S&P These bonds face exposure to adverse business or economic conditions which could lead to an issuer’s inadequate capacity to meet its financial commitment.


Highly Speculative Grades: Caa1, Caa2, Caa3 CCC+, CCC, CCC-
Moody's These bonds are of poor standing. Such issues may be in default, or there may be elements of danger with respect to principal or interest. Ca CC
S&P These bonds are vulnerable to nonpayment, and are dependent upon favorable economic conditions for the issuer to meet its financial commitment. C C


Default
S&P These bonds are in payment default. D