Standard and Poor’s (S&P) is a Credit Rating Agency (CRA) issuing municipal bond credit ratings for public and private company debt. The agency also issues ratings for debt from governments and other public borrowers. The S&P CRA is recognized throughout the country as a statistical rating organization by the United States Securities and Exchange Commission.
S&P offers credit ratings for both long-term and short-term requirements. For municipal bonds and other securities, long-term investment grade ratings are an important tool to assess securities’ creditworthiness.
Long-Term Investment Grade Credit Ratings
Borrowers are rated by S&P on a scale from ‘AAA’ to ‘D’. Investment grade ratings are securities with higher ratings of ‘AAA’ (highest) to ‘BBB-‘. These represent bonds with the highest creditworthiness.
Speculative grade bonds, also known as non-investment grade, represent securities with lower ratings from the S&P (‘BB+’ to ‘D’).
Below is an outline of each grade and what it means in terms of financial commitments and credit viability.
‘AAA’ is the highest S&P long-term investment rating. This number represents a debtor that has a highly exceptional ability to meet its financial responsibilities and commitments.
A rating of ‘AA’ also has a very strong ability to meet its financial obligations and commitments. These debtors differ a slight bit from the highest S&P ratings in the following ways:
- ‘AA+’ debtors carry very low credit risk but may have slightly higher risks associated with them for long-term debts.
- ‘AA’ debtors also bring a high quality rating with a slightly larger risk associated with long-term debt.
- ‘AA-' obligors also have a high ability to repay short-term debt, but may have an even larger risk for debts over a longer period of time.
Debtors with an ‘A’ municipal bond rating have a strong ability to meet their financial obligations. However, they are a bit more vulnerable to economic and circumstantial changes that could affect their overall repayment strength.
- ‘A+’ debtors are upper-medium grade with a low credit risk. Their susceptibility to economic changes keeps their ratings from the ‘AA’ and ‘AAA’ ratings.
- ‘A’ debtors also represent a strong ability to repay short-term debt but lack the same strength in long-term obligations.
Debtors that have a ‘BBB’ rating still represent a sufficient ability to meet their financial obligations. They are more susceptible to weakening economic conditions or other changing circumstances. These may have a stronger impact (and higher risk) on a debtor’s ability to repay.
Speculative Grade (BB+ and Below)
Ratings of ‘BB+’ and below are typically referred to as speculative grade. Obligors with these ratings are usually more vulnerable to economic conditions or other factors impacting their ability to meet their financial obligations.