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What do the credit ratings mean?

Here is Standard & Poor's definition of the ratings it awards to organisations issuing bonds.

AAA - Extremely strong capacity to meet its financial commitments.AAA is the highest issuer credit rating by Standard & Poor's.

AA - Very strong capacity to meet its financial commitments. It differs from the highest rated obligors only in small degrees.

A - Strong capacity to meet its financial commitments, but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

BBB - Adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

The above credit ratings are known as 'investment-grade debt'. Consider also a bond's credit history. Has the rating improved or declined over time? Bonds subject to a potential re-rating will be on 'credit watch'.

Below BBB - Bonds rated below BBB are known as 'non-investment grade', 'high yield' or, less charitably, as 'junk' bonds. These bonds are of a more speculative nature, and imply a certain degree of risk. In view of this, the incremental yield available on the instrument must be adequate to compensate the investor for this risk. Standard & Poor's gives the following definitions for non-investment grade debt.

BB - Less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments.

B - More vulnerable than the obligors rated BB, but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.

CCC - Currently vulnerable, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.

CC - Currently highly vulnerable.

C - May be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. C ratings will also be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

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