What does a Credit Rating indicate about a Bond?2 min read
Credit ratings are a measure of the creditworthiness of a bond issuer, indicating the issuer’s ability to pay back its debts on time. Credit rating agencies such as CRISIL, Care, ICRA, and others assign credit ratings to bonds based on the issuer’s financial strength, repayment history, and other relevant factors. Understanding credit ratings is important for investors, as it helps them evaluate the risk associated with investing in a particular bond. It is also important to note that Credit risk is just one of the risks associated with bonds; other risks like market risk, Interest rate risks should also be kept in mind while making a bond investment.
1. Did you know?
Government Bonds do not have a credit rating and are considered highly safe, and hence, are deemed to be rated as sovereign.
2. Types of Ratings
Credit ratings for all the other bonds are expressed as a letter grade, ranging from ‘AAA’ for the highest quality bonds to ‘D’ for bonds that are in default.
Here is a general overview of credit rating categories and what they represent:
- AAA & AA: These are considered investment-grade bonds and represent high-quality debt with a low risk of default.
- A & BBB: This is the lowest investment-grade rating, and bonds in this category are considered to have a moderate risk of default.
- BB & B: These are considered non-investment grade, or “junk” bonds, and represent higher-risk debt with a higher likelihood of default.
- C & D: These ratings are assigned to bonds that are already in default, and typically represent the highest-risk debt.
In addition to the letter grades, credit rating agencies also provide an outlook on the rating, which can be positive, negative, or stable. A positive outlook indicates that the rating is likely to be upgraded in the future, while a negative outlook suggests that the rating may be downgraded.
3. Are Credit Ratings Infallible?
A credit rating is only a base for the investor to make a decision. Historically, there have been times when credit ratings have not presented accurate information. The most famous example is that of Dewan Housing Finance Limited, which defaulted in 2018 even after being rated AAA by the Credit Rating Agencies.
Credit rating agencies earn most of their revenues from the issuer issuing the bonds, so this tends to have a bias on the way the credit rating agencies grade the bonds and may not reflect the most accurate picture. We strive to provide you with all the ratings available for the bond and show the lowest bond rating first.
Overall, understanding the credit rating of a bond is important for investors, as it helps them assess the creditworthiness and risk associated with the bond issuer. Investors should carefully evaluate the credit ratings of the bonds they are considering investing in, along with other factors such as the rate & tenure, before making an investment decision.