Researching credit ratings

Credit ratings are assessments of the creditworthiness of issuers (such as corporations and governments) and issues (such as bonds).

These ratings — typically expressed through standardised rating scales — serve as an indicator of the likelihood that the borrower will meet their financial obligations, including timely repayment of the principal amount and interest. A higher credit rating is indicative of lower credit risk, though one should remember that all such ratings are opinions, not guarantees.

There are many organisations which assign credit ratings. However, three leading credit rating agencies — Moody's, Fitch, and Standard & Poor’s (S&P) — hold a dominant position in the market, and are known as the 'Big Three'. Beneath these dominant players sit various specialist and country-specific agencies, such as AM Best, which specialises in credit ratings for the insurance sector.

Credit ratings are valuable tools for various stakeholders, including accountants, who utilise them for financial analysis and risk assessment purposes. They are often used to inform investment and other financial decisions.

In this relatively brief guide, we will limit our focus mainly to the 'general purpose' credit ratings produced by the Big Three agencies. Some consideration will also be given to AM Best.

Each of the Big Three rating agencies produce both long-term and short-term credit ratings, with a different rating scale for each.

A brief outline of the rating scales used by Moody's, Fitch and S&P is provided below, but those seeking detailed and authoritative ratings definitions should refer to the information available on the agencies' respective websites:

• Moody’s Ratings Definitions
• Fitch Ratings Definitions
• S&P Global Ratings Definitions

Information on the rating scales used by AM Best can be found in its 'Guide to Best's Credit Ratings' publication.

The table below outlines the long-term ratings scales used by each of the Big Three credit rating agencies.

	Moody's	Fitch	S&P
Investment grade	Aaa (highest) to Baa3 (lowest investment grade)	AAA (highest) to BBB- (lowest investment grade).	AAA (highest) to BBB- (lowest investment grade).
Speculative/non-investment grade	Ba1 (highest speculative grade) to C.	BB+ (highest speculative grade) to D (in default).	BB+ (highest speculative grade) to D (in default).

Here, it is important to understand the distinction between investment- and speculative-grade debt. In their 2022 'Guide to Credit Rating Essentials', S&P Global explain this as follows:

Also important to note are the modifiers used by the respective agencies to provide finer distinctions within generic rating categories. For example, Moody's appends numerical modifiers (1, 2, and 3) to each of its generic rating classifications from Aa to Caa, whilst S&P ratings from AA to CCC may be modified by the addition of a '+' or '-' sign.

The table below outlines the short-term rating scales used by each of the Big Three agencies.

Moody's	Fitch	S&P
P-1 (highest), P-2, P-3, NP (not prime).	F1+ (highest), F1, F2, F3, B, C, RD (restricted default), D (default).	A-1+ (highest), A-1, A-2, A-3, B, C, R, SD (selective default), D.

All of the Big Three rating agencies (along with AM Best) use outlook indicators to supplement some of their ratings. These indicators provide additional context and point to the potential future direction of the ratings in question.

For example, Moody's assigns ratings outlooks in four categories: Positive, Negative, Stable, and Developing. Fitch, meanwhile, may assign outlooks of Positive, Negative, Stable, or Evolving.

Whilst one should bear in mind that these indicators will not always be accurate in their predictions, they can help to inform investment decisions.

Although the Big Three agencies each employ slightly different rating scales, their respective scales are generally held to be broadly comparable. There are numerous online sources which map the scales onto one another — moneyland.ch, for example, has an article titled 'S&P, Moody's, Fitch Ratings Compared'.

However, whilst the methodologies used by each of the Big Three agencies are broadly similar, there are subtle differences in their approaches in some cases. As a result, it may be unwise to assume absolute equivalence between ratings issued by different agencies, or to treat them as straightforwardly interchangeable.

Certain methodological nuances might, for example, lead the same issuer to receive a slightly higher or lower rating from one agency than another. One should therefore exercise caution when comparing ratings and consider the specific methodologies and rationales behind each agency's assessment.

For specific information on the methodologies used by each of the Big Three, see the relevant pages on their respective websites, such as:

• Moody's — Methodologies and frameworks
• Fitch — Ratings criteria
• S&P Global — Ratings criteria and models

Each of the Big Three credit rating agencies provide free access to recent (and in some cases, historical) credit ratings via their official websites:

• Search Moody's credit ratings (free registration required)
• Search Fitch credit ratings
• Search S&P Global credit ratings (free registration required)

In most cases historical ratings are not available via the above channels. They may however be accessible via third-party subscription services such as Bloomberg or Eikon, or via the agencies' own paid-for data solutions (such as S&P RatingsDirect).

AM Best also makes its credit ratings freely available via its Company and Rating Search tool (free registration required).