WHAT IS A CREDIT RATING?

A credit rating evaluates the creditworthiness of a debtor. Similar to how each of us has an internal credit score kept by a bank to determine spending limits on our credit cards, credit ratings provide a scorecard for a corporate or government.

There are several third-party agencies which sells a corporate credit or sovereign credit rating for a fee paid by the rated entity. Some of the more popular rating agencies are Moody’s (founded in 1909), Standard & Poor’s (founded in 1860) and Fitch Ratings (1913). These companies’ rating services are more popularly used amongst institutions and investors in order to complement  their due diligence process and pricing of debt. Below is a breakdown of the credit rating scale:

 

Moody’s	S&P	Fitch	Rating Description
Aaa	AAA	AAA	Prime
Aa1	AA+	AA+	High grade
Aa2	AA	AA
Aa3	AA-	AA-
A1	A+	A+	Investment Grade
A2	A	A
A3	A-	A-
Baa1	BBB+	BBB+
Baa2	BBB	BBB
Baa3	BBB-	BBB-
Ba1	BB+	BB+	High-yield
Ba2	BB	BB
Ba3	BB-	BB-
B1	B+	B+
B2	B	B
B3	B-	B-
Caa1	CCC+	CCC	Speculative
Caa2	CCC
Caa3	CCC-
Ca	CC	CC
C	C	C
D	D	D	Default

 

A credit rating scale of AAA suggests that the debt has a very low probability of default. As the rating moves down the credit curve into high-yield or speculative grade, a debt would carry a much higher probability of default. Credit ratings essentially reflect the perceived credit risk of a debt issue. Credit risk measures both the probability of an entity failing to make timely payments and the magnitude of a potential loss during a default.

Some examples of Singapore corporations with a credit rating include Hong Kong Land Holdings (SGX:H78), OCBC Bank (SGX:O39) and SMRT Corp Ltd (SGX:S53) with corporate credit ratings at A3 (by Moody’s), AA- (by S&P’s) and AAA (by Moody’s) respectively.  These companies tend to be frequent issuers of debt and thus would prefer to be rated by an agency. As these companies’ financial profile improves, their credit ratings can be notched higher which allows debt to be issued at a cheaper rate (i.e. lower coupon rate). In Singapore, a Real Estate Investment Trusts (REIT) such as Capitamall Trust (SGX:C38U) and Suntec REIT (SGX:T82U) are able to increase their limit on aggregate borrowings from 35% to 60% of their deposited property if they have a disclosed credit rating.

Value In Action

An investor interested in an equity stake of a company can do a quick check on the company’s credit rating to assess its debt profile to complement in his/her financial analysis of the company.

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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie doesn’t own shares in any companies mentioned above.

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