Question

1) what are the different bind ratings and what do they mean

2) If a bond’s rating goes from Ba1 to Ba2 what does it mean. Also what does it mean if the bond’s probability of default rating goes from Ba1-PD to Ba2-PD.

Answer 1

What are the different bond ratings and what do they mean?

A bond rating is a letter based grading system, assigned to bonds which indicate the credit quality of the Bonds. Primarily, bond rating is the evaluation of a bond issuer's (Corporate/Government) financial position or strength, or its ability to pay a bond's principal and interest in time. Bond rating is provided by mainly one of the big three S&P’s, Moody’s, and Fitch Ratings.

Bond Rating Codes (Types)

1. Aaa (AAA) – This rating is provided to the issuer who has Extremely Strong (i.e. excellent) capacity to meet its financial commitments.

2. Aa1/Aa2/Aa3 (AA+/AA/AA-) - This rating is provided to the issuer which has Very Strong (i.e. Very Good) capacity to meet its financial commitments.

3. A1/A2/A3(A+/A/A-) - This rating is provided to the issuer which has Strong (i.e. Good) capacity to meet its financial commitments, but it is susceptible to negative impact of change in global economy and economic conditions.

4. Baa1/Baa2/Baa3(BBB+/BBB/BBB-) - This rating is provided to the issuer which has Adequate capacity to meet its financial commitments, but it is more susceptible to negative impact of change in global economy and economic conditions.

5. Ba1/Ba2/Ba3(BB+/BB/BB-) - This rating is provided to the issuer which has Less Vulnerable capacity to meet its financial commitments, but it is highly susceptible to negative impact of change in global economy and economic conditions.

6. Caa (CCC) - This rating is provided to the issuer which is Currently Vulnerable capacity is mostly dependent on positive or favorable global economy and economic, financial conditions.

7. Ca (CC) - This rating is provided to the issuer which is Currently Highly Vulnerable capacity to meet its financial commitments.

8. C (D) - This rating is provided to the issuer who has failed to meet its financial obligations.

If a bond’s rating goes from Ba1 to Ba2 what does it mean? Also what does it mean if the bond’s probability of default rating goes from Ba1-PD to Ba2-PD.?

1. Issuers having rating Ba1 are assessed to be speculative and are subject to a substantial risk of defaulting on certain senior operating obligations and other contractual commitments. Further it is considered less vulnerable in the near term to its other lower-rated obligors i.e. Ba2. However, it has negative impact on ongoing uncertainties and exposure to adverse business, financial, or economic conditions, which would result into inadequacy of the issuer to meet its financial commitments.

2. PD refers to Probability of Default, an opinion for chances that the issuer will default on one or more of its financial obligations. Issuers having rating Ba1-PD are assessed to be speculative and are subject to a substantial risk of defaulting in its financial obligations though it is considered less vulnerable in the near term to its other lower-rated obligors i.e. Ba2-PD.

The probability of default rating goes hand on hand with Bond rating; at a point of time PD assesses the likelihood that the default would be committed at that point in time. As the risk is assessed, throughout the economic cycle the borrower (i.e. Issuer) will move up or down in rating grades.