A credit rating is an independent opinion of the likelihood that an issuer will pay interest and principal in full and on time. Ratings are not recommendations to buy or sell and they can change.
| Category | S&P / Fitch | Moody's |
|---|---|---|
| Highest quality | AAA | Aaa |
| High quality | AA+, AA, AA- | Aa1, Aa2, Aa3 |
| Upper medium | A+, A, A- | A1, A2, A3 |
| Lower medium (lowest investment grade) | BBB+, BBB, BBB- | Baa1, Baa2, Baa3 |
| Speculative | BB+, BB, BB- | Ba1, Ba2, Ba3 |
| Highly speculative | B+, B, B- | B1, B2, B3 |
| Substantial risk to default | CCC, CC, C | Caa, Ca, C |
| In default | D (S&P), RD/D (Fitch) | — |
Investment grade and high yield
Bonds rated BBB- / Baa3 or higher are "investment grade". Below that they are "high yield" or "sub-investment grade". Many institutional investors can only hold investment-grade bonds, so a downgrade across this line (a "fallen angel") can lead to heavy selling.
Outlooks and watches
Agencies also publish outlooks (positive, stable, negative) showing the likely direction over the next one to two years, and place ratings on "watch" when a change may happen soon.
Limits of ratings
- Ratings react to events and can lag the market.
- They measure default risk, not price volatility or liquidity.
- Investors are expected to do their own analysis of the issuer and the bond's terms.