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.”
Are corporate bonds of high quality?
Investment-grade and speculative-grade (or high yield) bonds are the two primary credit classifications for corporate bonds. Speculative-grade bonds are issued by corporations whose credit rating is deemed to be weaker than that of investment-grade companies.
What is the definition of an investment-grade bond?
Bonds rated Baa (by Moody’s) or BBB (by S&P and Fitch) or above are thought to have a lesser risk of default and obtain higher ratings from credit rating organizations. The yields on these bonds are often lower than those on less creditworthy bonds.
What does it imply to have a BBB bond rating?
The BBB grade indicates that the danger of default is now minimal. Although the capacity to pay financial obligations is considered adequate, poor business or economic situations are more likely to erode it.
BBB debt accounts for what percentage of investment grade debt?
Around half of all investment-grade bonds traded in the United States are rated BBB or Baa. While that number lowers to 25% for all Canadian corporate bond issuances traded in the United States, it still represents a significant portion of the market.
What is the lowest credit rating a bond may have while still being deemed investment grade?
If government and private fixed income products, such as bonds and notes, have a minimal risk of default, they are deemed investment grade in finance. Credit rating organizations like Standard & Poor’s and Moody’s use a relative scale to define investment grade. These credit ratings reflect a borrower’s ability and willingness to repay its obligation, and are based on a variety of financial and economic factors that influence the borrower’s creditworthiness. Investment-grade securities have a Standard & Poor’s rating of BBB or above, and a Moody’s rating of Baa3 or higher.
Is BBB superior to BB?
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 types of 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.
Non-investment grade bonds are what they sound like.
A non-investment grade bond, also known as a speculative bond, a high yield bond, an unsecured debenture, or a junk bond, is a bond that is regarded as a low-quality investment due to the possibility of default by the issuer. To compensate for the additional risk, non-investment grade bonds have higher yields than investment grade bonds.
What is the difference between a bond with an A rating and one with a B rating?
Some of the most well-known bond-rating agencies are Moody’s, Standard and Poor’s, Fitch Ratings, and DBRS. These organizations exist to give quantitative and qualitative descriptions of the fixed income securities that are available to investors. In general, a “AAA” high-grade rated bond provides more security and lesser profit potential (lower yield) than a speculative bond rated “B-.”
What exactly does BBB negative imply?
The ratings will not change if the outlook remains stable. The ratings may be decreased if the outlook is negative, while the ratings may be increased if the outlook is positive.
Ratings agencies also provide a dynamic or evolving outlook, indicating that the ratings may be decreased or improved in the future.
However, a change in ratings is not always preceded by a change in outlook. In general, rating agencies give a stable outlook in their long-term ratings.
A sovereign rating drop indicates that the government is less capable of meeting its debt obligations. As a result, the cost of government borrowings rises.
Top rating agencies such as Standard & Poor’s, Fitch Ratings, and Moody’s Investors Services have given India’s long-term debt the lowest investment grade ratings.