Comparing investment-grade loans and Treasuries: Credit ratings

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Comparing investment-grade loans and Treasuries: A key guide (Part 2 of 4)

(Continued from Part 1)

Credit ratings

Credit ratings are a measure of the creditworthiness of a borrower. They’re assigned by credit rating agencies like Standard & Poor’s or Moody’s. Credit ratings assigned to debt issues provide information regarding the credit quality of the issuer and the risk of loan default. The higher the rating, the higher the borrower’s creditworthiness and the lower the risk of default. The schedule below gives a picture of Moody’s long-term obligation ratings by relative credit risk of fixed-income obligations with an original maturity of one year or more.

 Source: Moody’s Investor Services

Treasuries, issued by the U.S. government, are considered the safest fixed-income securities in the bond markets, as they’re backed by the full faith and credit of the U.S. government. They’ve usually, until recently, been assigned a rating of AAA. The U.S. government currently enjoys the highest credit rating (AAA or Aaa) from two of the big three credit rating agencies (Fitch, Moody’s, and S&P). Standard & Poor’s downgraded U.S. government debt in August 2011 to AA+. Between July 16, 2011, and September 14, 2012, Egan-Jones, a smaller credit rating agency, cut the rating on U.S. government debt three times (the last time to AA-) citing “lack of any tangible progress on addressing the problems and the continued rise in debt to GDP.”

A loan, to be considered investment-grade, must be rated BBB- or above. Below the credit rating of BBB-, debt is considered to have low credit quality and classified as non–investment-grade, known as “high yield” or “junk” for bonds and “leveraged” for loans. Investment-grade loans, by definition, must be issued by borrowers with high credit quality and receive a rating above BBB-. Credit ratings for investment-grade bonds can range from AAA (the highest) to BBB- (a notch above speculative-grade or junk).

Continue to Part 3

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