Ratings firms investigate each bond issuer’s financial condition (including municipal bond issuers) and assign ratings to the bonds on the market. Each agency follows a similar structure to enable investors compare the credit rating of a bond to that of other bonds. “Investment-grade” bonds have a rating of BBB- (on the Standard & Poor’s and Fitch scales) or Baa3 (on the Moody’s scale) or higher. Bonds with lower ratings are referred to as “high-yield” or “junk” bonds since they are deemed “speculative.”
What does the bond rating BBB stand for?
Standard & Poor’s and Moody’s employ separate designations to indicate a bond’s credit quality rating, which consist of the upper- and lower-case letters “A” and “B.” Investment grade is defined as “AAA” and “AA” (high credit quality) and “A” and “BBB” (medium credit quality). Bonds with credit ratings below these categories (“BB,” “B,” “CCC,” and so on) are referred to as “junk bonds” because they have a low credit grade.
What exactly is the distinction between AAA and BBB bonds?
Bonds with a higher rating, referred to as investment grade bonds, are considered to be safer and more dependable investments. These types of investments are linked to companies that are publicly listed and government agencies that have a positive outlook. Standard and Poor’s assigns “AAA” to “BBB-” ratings to investment-grade bonds, whereas Moody’s assigns “Aaa” to “Baa3” ratings. Bond rates often rise as ratings fall on investment-grade bonds. The most frequent AAA-rated bond securities are US Treasury bonds.
Which businesses have a BBB bond rating?
Due to loan repayments at AT&T and General Electric, which offset United Technologies’ and Broadcom’s borrowing to fund acquisitions, debt levels and leverage for the top 10 borrowers have declined marginally this year. The weighted average leverage has decreased marginally, from 3.2x at the end of 2018 to 3x in mid-2019.
In 2020, we predict credit metrics to improve further, with the bulk of the top ten keeping reasonably constant metrics and a few achieving more significant improvements. We expect GE, CVS Health, and United Technologies to reduce their leverage in 2020, owing to asset sales, sustained debt payments, and an all-stock merger, respectively.
Meanwhile, the top 10’s downgrade risk and upgrade potential are fairly matched. In reality, Verizon and United Technologies are both rated ‘BBB+,’ the highest rating in the ‘BBB’ category. Verizon’s rating outlook is positive, while United Technologies’ rating is on CreditWatch with positive implications, implying that both businesses could be upgraded to the ‘A’ category in 2020.
By 2020, Verizon’s focus on debt reduction should allow it to achieve an adjusted leverage of 2.5x. As of June 2019, the company’s leverage was 2.7x, and we believe it has a high chance of reducing leverage to below 2.5x by 2020, which is our criterion for an upgrade to ‘A-.’ The proposed combination of Raytheon and United Technologies’ aerospace companies (Pratt & Whitney and Collins Aerospace) is intended to boost the merged company’s credit metrics, scale, and diversification. Once the transaction closes and we have completed our analysis of the transaction, we may upgrade our rating of the company up to two notches, to ‘A.’
Ford Motor Company, Energy Transfer L.P., and Broadcom Inc. all have a BBB- rating. These accounts for 27% of the top ten debts. The prospects appear to be stable.
Broadly Stable Leverage Expected For Top 10 ‘BBB’ Companies In EMEA
The ten largest nonfinancial corporates in EMEA that we rate in the ‘BBB’ category also have a lot of debt—nearly $800 billion in gross reported debt outstanding (approximately €720 billion) (as of June 30, 2019). At around one-third of the $2.3 trillion borrowed by all ‘BBB’ category corporates in the region, we consider this to be a high degree of concentration. (Note that this figure does not include the $1.4 trillion in rated “BBB” debt, but it does include all debt borrowed by these issuers.) For a complete list of the top 10 ‘BBB’ EMEA corporations, see table 4 in Appendix I.
What does a BBB debt rating mean?
BBB bonds offer a potentially better rate of return than higher-rated bonds while still giving some level of security to investors. A BBB grade indicates that the rating agency does not believe a company will fail on its obligations or go bankrupt. However, because BBB has a larger risk than better ratings, the interest payment will be more. BBB bonds could be a smart strategy to supplement a diverse portfolio’s income.
What are the five different kinds of bonds?
- Treasury, savings, agency, municipal, and corporate bonds are the five basic types of bonds.
- Each bond has its unique set of sellers, purposes, buyers, and risk-to-reward ratios.
- You can acquire securities based on bonds, such as bond mutual funds, if you wish to take benefit of bonds. These are compilations of various bond types.
- Individual bonds are less hazardous than bond mutual funds, which is one of the contrasts between bonds and bond funds.
What does the BBB+ rating indicate?
BBB+ BBB+ BBB+ An obligor has the financial resources to pay its obligations. Adverse economic conditions or shifting circumstances, on the other hand, are more likely to erode the obligor’s ability to satisfy its financial obligations. Baa2.
Is BAA a high-yielding product?
The Moody’s Baa Corporate Bond Index measures the average yield of corporate bonds with a credit grade of Baa from Moody’s. Corporate bonds can be given ratings ranging from Aaa to C. Bonds with a Baa rating are categorized as medium-grade obligations, which are neither highly protected nor badly secured. Investment-grade bonds have a rating of Baa or higher.
FRED (Federal Reserve Economic Data), the St. Louis Fed Research Department’s library of more than 20,000 U.S. economic time series, has even more long-term Yield on Baa-rated Corporate Bonds charts and historical data.
What are AAA bonds, exactly?
AAA is the highest credit rating that any of the main credit rating agencies may give to an issuer’s bonds. AAA-rated bonds have a high credit rating since their issuers are able to satisfy their financial obligations with ease and have the lowest chance of default. The initials “AAA” are used by rating firms Standard & Poor’s (S&P) and Fitch Ratings to identify bonds with the greatest credit quality, while Moody’s uses the identical “Aaa” to indicate a bond’s top-tier credit rating.