Credit Rating
An assessment of a borrower's creditworthiness and likelihood of default, issued by rating agencies such as Moody's, S&P, and Fitch.
What is Credit Rating?
A credit rating is an opinion about the creditworthiness of a debt issuer — a corporation, government, or structured security — and its ability to meet debt obligations. The major credit rating agencies are Moody's, S&P Global Ratings, and Fitch. Ratings range from high investment-grade (AAA/Aaa) down through speculative grade (also called junk or high-yield), with the lowest ratings indicating default or near-default. Investment-grade ratings (BBB-/Baa3 and above) are critical for bond issuers because many institutional investors are restricted from holding speculative-grade debt. A rating downgrade increases a borrower's cost of capital, can trigger covenant violations, and may force forced selling by index funds and insurance companies.
Example
S&P's downgrade of US sovereign debt from AAA to AA+ in August 2011 was the first-ever downgrade of US government debt. Despite the downgrade, Treasury yields initially fell as investors fled to safety, demonstrating that ratings are not always the primary determinant of market pricing for the most liquid sovereign bonds. However, for corporate issuers, a downgrade from BBB to BB (the investment-grade/junk boundary) typically causes a significant yield spread widening and can trigger forced selling by investment-grade bond funds.
Source: S&P Global — Rating Definitions