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Created on 19.02.2018

What are ratings?

You are bound to have come across the term “rating” in relation to investments. Put simply, ratings are “evaluations”.

Ratings provide an indication of the quality of bonds issuers (countries or companies). Independent ratings agencies assess debtors’ creditworthiness based on defined criteria. The rating provides investors with information about the probability of an issuer repaying the capital obtained and paying the interest due.

The three largest and most well-known ratings agencies are Fitch, Moody’s and Standard & Poor’s. All three of these US agencies carry out ratings analyses for countries and companies all over the world. However, there are also smaller, regional ratings agencies. Standard ratings and scales are used to compare the ratings of different countries and companies. Banks also have their own ratings systems which they use to evaluate borrowers. And banks themselves are of course also subject to agencies’ rating processes. Ratings are regularly assessed and updated based on the latest events and developments in the market and global economy.

The ratings are expressed in letter combinations, a bit like school grades. The ratings scale goes from “AAA” – the best rating representing the lowest risk – to “C” or even “D”. The symbols “+” or “-” or numbers are sometimes added to the letters: “A+” is therefore better than “A-”, and “A1” is better than “A3”. Generally, ratings with one or more “A”s signify a secure investment, “B” designates investments that are speculative or just below average and one or more “C” or “D” means that defaults can be anticipated.

Rating

Credit risk

AAA, AA+, AA, AA-

negligible

A+, A, A-, BBB+, BBB, BBB-

very low to low

B+, B, B-

low to moderate

CCC+, CCC, CCC-

moderate to high

CC, C, D

very high

Ratings inform investors of the risk they are assuming when making an investment. The greater the risk, the higher the return – or interest, in the case of bonds – that can usually be expected. Of course, this means that there is also a higher risk of the country or company you have invested in not being able to repay your capital. If an issuer’s rating is poor, i.e. below “BBB”, then an investment is speculative. Such cases are also referred to as high yield bonds or junk bonds. A “BBB” rating indicates an investment-grade loan. These have good creditworthiness.

Switzerland – for example – has an “AAA” rating with all three major agencies – Fitch, Moody’s and Standard & Poor’s.

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