Credit rating

Standard and Poor's and Fitch run from AAA down through AA, A, BBB, BB, B and CCC to D; Moody's runs Aaa, Aa, A, Baa, Ba, B and Caa downwards. Each middle category splits three ways with a plus and a minus, or a 1, 2 and 3 at Moody's. The line that matters sits between BBB minus and BB plus, or Baa3 and Ba1, and separates investment grade from speculative grade.

A rating is an opinion about relative creditworthiness. It is not a recommendation, because it says nothing about price, and it is not a promised default probability. What gives it force beyond its content is that other people's rules are written to it: insurance capital charges, institutional mandates and bond index inclusion all key off rating bands, so a rating decides who may hold the debt as well as what it costs.

Agencies build a rating in a published order rather than from a single ratio. Business risk comes first, covering industry cyclicality, country risk, scale, market position, diversification and margin stability. Financial risk follows, covering leverage, coverage and the volatility of cash flow against thresholds the agency publishes. The two combine into an anchor, which modifiers then move: diversification, capital structure, liquidity, financial policy, governance and a comparison against peers already rated.

The agency's figures are restated, not the company's. Unfunded pension deficits are usually treated as debt, hybrids get partial equity credit, and the agency applies its own EBITDA definition, so agency leverage, covenant leverage and the company's own adjusted leverage are three different numbers.

An issuer rating describes the borrower. A rating on a specific instrument describes expected loss on that claim, so the two differ by notching for seniority and security.