AAA rating Definition

GLOSSARY

Published by a ��Ӱ�� Pensions expert

What does AAA rating mean?

The highest credit rating for a bond or company.

The risk of default is (or was) considered to be negligible. AA rated bonds (slightly higher risk) are used as the basis for valuing pension scheme liabilities in company accounts.

View the related practice notes about AAA rating

Credit ratings

Role The role of credit rating agents (CRAs) is to provide an objective and analytical opinion on the risk of payment defaults by looking at various factors that help investors decide whether to invest in particular securities. Investors in capital markets are very sensitive to risk and some investors are prevented by their internal constitutional documents from investing in low grade securities. Generally the higher the investment risk, the greater the return (interest/coupon) the investor will seek.Both (i) the company issuing the security instruments and (ii) the security instruments themselves can be rated, meaning that all of the following can be rated:•the issuer•senior debt/syndicated loans•medium term notes (MTNs)•commercial paper (CP)•fixed income securities•sovereign debt•residential mortgage backed securities (RMBS)•commercial mortgage backed securities (CMBS)CRAs typically look at qualitative, quantitative and legal issues to decide on a credit rating, including:•current financial statements plus profitability•past performance•projected performance (including cashflow projections and cash flow adequacy)•strength of existing management, governance, risk tolerance, financial policy •market position plus peer group comparison•operating environment•legal opinions•guarantees/collateral•country risk•industry characteristics•capital structureThe CRAs then...

Impact of credit ratings downgrades

Impact of credit ratings downgrades Ratings outlooks and watch-lists Three of the main credit rating agents (CRAs) are: Moody's Investors, Standard & Poor's (S&P) and Fitch Ratings, and they periodically review ratings. The CRAs can issue rating outlooks, which are opinions about the likely direction of a rating over the medium term (ie in the next 6 to 24 months) which can be: • positive • negative • stable • developing or evolving Typically, the outlook specifies the rationale for the potential change and the extent of the potential change; the majority of outlooks are generally stable. In practice, if an issuer's creditworthiness is deteriorating and it is expected to default on a payment, it may be placed on negative outlook or negative watch to signal its credit rating may be downgraded. Being given a negative outlook or being placed on a watch-list of itself is not a rating action, but may be a precursor to it. Watch-lists are used to indicate that a rating is under...

Discover our 2 Practice Notes on AAA rating

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GLOSSARY