{"id":9540,"date":"2020-09-01T19:32:00","date_gmt":"2020-09-01T23:32:00","guid":{"rendered":"https:\/\/ibkrcampus.eu\/trading-lessons\/credit-ratings-2\/"},"modified":"2024-02-15T21:26:48","modified_gmt":"2024-02-15T21:26:48","slug":"credit-ratings-2","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.eu\/campus\/trading-lessons\/credit-ratings-2\/","title":{"rendered":"Credit Ratings"},"content":{"rendered":"

While\u00a0corporate bond investors\u00a0should\u00a0conduct their own due diligence on a proposed debt instrument, and its issuer, in large part by closely analyzing a company\u2019s financial health,\u00a0operational\u00a0risks, interest-rate environment, and impacts from central bank policies, they may also take into account third-party analysis from credit ratings agencies.<\/span><\/span>\u00a0<\/span><\/span><\/p>\n


\nYou may recall that investors in this asset class are\u00a0more concerned with income generation and capital preservation rather than on growth, and, as such, are primarily focused on the return of their principal when the bond matures, as well as their timely receipt of interest payments as long as the debt is held.<\/span><\/span>\u00a0<\/span><\/span><\/p>\n

\"\"<\/p>\n

By analyzing credit risk, a corporate bond investor is essentially evaluating the likelihood a company may default on its debt obligations \u2013 which is the primary objective of credit ratings agencies such as\u00a0Moody\u2019s Investors Service, S&P Global Ratings, and Fitch Ratings, among others.<\/span><\/span>\u00a0<\/span><\/span><\/p>\n

\u00a0<\/span><\/span><\/p>\n

The level of credit risk posed by a specific corporate bond, as well as by its issuer, generally indicates the\u00a0severity of default risk\u00a0an investor assumes.\u00a0<\/span><\/span>\u00a0<\/span><\/span><\/p>\n

\u00a0<\/span><\/span><\/p>\n

To rank this severity, credit ratings\u00a0agencies typically use a\u00a0scale.\u00a0This scale\u00a0categorizes\u00a0the creditworthiness of most issuers of\u00a0corporate\u00a0debt, as well as their debt offerings, with designations usually divided into\u00a0investment-grade (\u2018AAA\u2019-\u2018BBB\u2019) and lower-quality (\u2018BB\u2019-\u2018C\u2019) credits.<\/span><\/span><\/p>\n

\"corporate<\/p>\n

A\u00a0corporate\u00a0bond issuer\u00a0assigned an investment-grade\u00a0credit\u00a0rating is considered by that ratings agency to be more likely to make timely debt service payments than\u00a0those deemed\u00a0non-investment-grade \u2013\u00a0which\u00a0are\u00a0also referred to as\u00a0\u2018high-yield\u2019, \u2018speculative\u2019 or \u2018junk\u2019\u00a0bond issuers.<\/p>\n

Corporate bond investors are generally compensated for higher degrees of credit risks in the form of higher interest rates.<\/p>\n

For example, using the\u00a0Global Bond Scanner in the IBKR Trader Workstation, we\u2019ll show how coupons on different grades of corporate bonds differ in value.<\/p>\n

For illustrative purposes, we\u2019ll select a corporate bond with\u00a0an\u00a0investment-grade\u00a0credit\u00a0rating by both Moody\u2019s and S&P, such as\u00a0\u2018A\u2019-rated\u00a0Huntington National\u00a0Bank\u2019s\u00a0bond\u00a0due\u00a0February 4, 2030, which carries a\u00a02.55% coupon.\u00a0Meanwhile,\u00a0a\u00a0non-investment-grade,\u00a0\u2018BB\u2019-rated\u00a0bond\u00a0by Colombian financial services firm Grupo Aval,\u00a0which was\u00a0issued\u00a0on the same day as Huntington National\u2019s sale,\u00a0and which\u00a0matures\u00a0on\u00a0exactly\u00a0the same\u00a0date, carries a\u00a0much larger 4.375%\u00a0coupon.\u00a0<\/em><\/p>\n

\"tws\"Overall,\u00a0credit ratings agencies generally aim to provide a well-detailed, fundamental assessment about a corporate bond issuer, and its debt\u00a0offering, for investors to factor into their investment decisions.<\/p>\n

They may provide an analysis of:<\/p>\n