Much like the Standard and Poor’s rating system, the Moody’s system offers bond ratings with letter grades representing a debtor’s creditworthiness. In many circumstances, this is also known as a risk of default for borrowers. Higher ratings mean that a debtor is more likely to successfully repay a debt without defaulting.
Moody’s offers ratings for debt securities in multiple market areas – both public and commercial. Beyond the aforementioned municipal bonds, these also include corporate bonds, government bonds, managed investments, hedge funds, etc.
The ratings scale starts at 'Aaa' and extends to down to 'C'. Ratings from a 'Baa' level up to the 'Aaa' level are considered investment grade. Ratings below this threshold are only considered speculative grade.
Investment Grade Ratings Guide
Below is an outline of all the investment grade ratings from Moody’s and what they mean in terms of creditworthiness.
A Moody’s rating of ‘Aaa’ represents the highest quality debtor with the lowest risk for lending. These debtors have the greatest ability for repayment of debt both in short-term and long-term situations.
‘Aa’ quality grades also demonstrate very high quality in creditworthiness. These debtors carry very low risk in terms of repayment, particularly in short-term debt. They may have a slightly higher risk for long-term repayment due to economic or other changing market conditions.
The 'Aa' scale is numerically ordered as 'Aa1', 'Aa2' and 'Aa3', where 'Aa1' ratings are the highest in the category (with the least risk) and 'Aa3' the lowest.
‘A’ level ratings are designated as upper-medium grade in the debtor’s creditworthiness with a relatively low credit risk. They vary between the highest or a high ability to pay back their short-term debts. Their long-term forecasts may leave a bit more ambiguity in repayment ability, adding more risk to their rating than ‘Aa’ or ‘Aaa’ rated debtors.
The 'A' scale is also numerically ordered as 'A1', 'A2' and 'A3' with 'A1' at the Prime-1 level of short-term ratings (best in their ability to repay short-term debts) and 'A2' and 'A3' at the Prime-2 level (a high ability to repay short-term debt).
‘Baa’ ratings are known as medium-grade in terms of creditworthiness. They carry some ambiguity and speculation within their long-term forecasts which may impact their ability to repay. They represent a moderate credit risk.
‘Baa’ ratings also follow a 1, 2 and 3 rating scale where 'Baa1' carries a Prime-2 designation for a higher ability to repay short-term debt. 'Baa2' and 'Baa3' ratings may have a slightly lower creditworthiness (Prime-2 to Prime-3) giving them an acceptable designation to their ability to repay.
Debtors rated below the investment grade threshold represent non-prime ratings in both short and long-term debt. They bring a much higher credit risk which increases their likelihood of default or other repayment problems.