Understanding A-/A3 Credit Rating: Evaluating Bond Creditworthiness

When investors seek to purchase bonds or other types of debt instruments, one of the key metrics they examine is the credit rating of the issuer. Two prominent rating agencies that provide this information are Moody's and Standard & Poor's (S&P), both of which rate bonds on a scale to indicate the likelihood of default. The rating categories they assign are similar, and in this article, we're focusing on a specific rating: A-/A3.

The Significance of A-/A3 Credit Rating

A- is a rating given by S&P, while A3 is an equivalent rating provided by Moody's. They both reflect the creditworthiness of long-term investment-grade bonds. The rating A-/A3 is an affirmation of financial stability and is characterized by a relatively low risk of default.

When a company or debt issue receives an A-/A3 rating, it signifies that it holds a solid credit standing in the financial market. Essentially, this rating reflects the issuer's capacity to meet its financial commitments. However, it's important to note that these ratings are assigned based on the current information and analysis available to the rating agencies, and as such, they could be subject to change if a company's financial situation changes.

Investment Grade vs Junk Bonds

The credit ratings also categorize bonds into investment-grade or non-investment-grade (junk) bonds. An A-/A3 rating firmly places the issuer within the bounds of investment grade, indicating a lesser risk of default compared to bonds rated below it. However, it's also crucial to understand that an A-/A3 rating is nearing the lower end of the investment-grade spectrum, and while it is a medium-grade investment, it's getting closer to the junk bond range.

While the topmost rating—AAA for S&P or Aaa for Moody's—might be out of reach for some issuers due to various factors, such as the credit rating of the country they are based in, the A-/A3 rating still places them in a favorable light in the investment community. These bonds may find their way into the Class A tranche of asset-backed security, considered to be relatively low-risk.

The Challenges and Controversies in Rating

The process of assigning credit ratings is complex and sometimes controversial. Although agencies like Moody's and S&P follow rigorous methodologies and analyses, they are not infallible. Their ratings have been called into question, especially following instances where highly-rated companies declared bankruptcy almost out of the blue.

While the A-/A3 rating indicates a level of trust in the company's ability to fulfill its obligations, investors must always conduct their due diligence and not rely solely on the rating. The rating agencies provide an analysis and a viewpoint that is one piece of the larger investment puzzle.

An A-/A3 rating reflects a relatively low risk of default and an issuer's strong ability to meet financial commitments. However, investors should use this as just one factor in their overall investment analysis, considering the potential for errors and changes in the issuer's circumstances.

Summary:
A- — S&P / Fitch
A3 — Moody’s

Rating institutions assign various levels of credit ratings to signify the chance of default; the A-/A3 rating is considered Investment Grade, but it is getting closer to the Junk Bond range.

If a company or debt issue has a rating of A-/A3, it means that S&P and Fitch have given it an A- and Moody’s has given it an A3 rating. They have their own symbology for their ratings system but these are at the same level on both scales: these ratings are at the 6th or 7th degree from the top possible ratings, which is AAA/Aaa.

The top ranking is not always available, since it may depend on the credit rating of the country in which the company is based, so this is why we say 6th or 7th. This is the lowest rating available in the A-range.

At this level and higher, if a debt cash flow is put into an asset-backed security, it would be part of the Class A tranche, which has almost no risk of default, ostensibly.

In terms of Investment Grade vs. Junk Bonds, an issue or company with the A-/A3 rating would still have a buffer between this level and the Junk Bond rating, since Investment Grade debt goes all the way down 3 levels to Baa3/BBB-.

Another term for the A-/A3 rating is Upper Medium grade.

The ratings institutions are not bullet-proof, however, and have been accused of negligence and possible conflicts of interest due to the high ratings were given to several companies in the last 15 years that were upheld until the day the highly-rated companies declared bankruptcy.

What is a Credit Rating?
What are Bond Ratings?