In the realm of credit ratings, the A/A2 credit rating carries significant weight. This rating is attributed predominantly to bond issues and insurance companies, denoting a certain degree of financial reliability and security. This credit score is lodged firmly in the upper medium band of what is called "Investment Grade" ratings, an appellation given to bonds that are perceived to have a very low default risk.
Investment Grade Bonds: The A/A2 Rating
The world of credit ratings is intricate, involving a slew of rating institutions that follow slightly different ranking methodologies. However, their ratings all signify the same amount of risk. The A/A2 rating is a perfect example of this. It's an investment grade rating given by two of the major rating institutions - 'A' is from Standard & Poor's (S&P) and Fitch, while 'A2' is the equivalent rating by Moody's.
From the top-rated AAA/Aaa to the lower spectrum of BBB-/Baa3, the Investment Grade category encompasses a variety of bonds. These bonds are characterized by their low default risk, making them attractive options for conservative investors who prioritize safety over higher returns.
A Look at Credit Rating Institutions
The credit rating arena is dominated by three key players – Fitch, Moody’s, and Standard & Poor’s (S&P). These institutions are responsible for assessing and ascribing the credit ratings to bonds and large companies, significantly influencing the investment decisions of institutional and individual investors alike.
While their role is of paramount importance, they are not exempt from controversy. These institutions have been accused of gaining large revenues from their rating services without adequately shielding investors from risks. This criticism stems from instances when large corporations, despite having superior credit ratings, declared bankruptcy unexpectedly, thereby catching investors off guard.
Yield, and the Role of Credit Ratings
One of the most critical factors that the A/A2 credit rating influences is the yield a company is anticipated to offer on a bond issue. Essentially, it compensates investors for the risk they undertake. Bonds with a higher credit rating, such as those in the A/A2 category, can afford to have a lower yield because they are deemed secure investments.
On the contrary, bonds rated below BBB-/Baa3 are termed "Junk Bonds" or "High Yield" bonds. These bonds are deemed to carry a higher risk of default, necessitating a higher yield to compensate investors for their increased risk exposure.
Insurance and Surety
Lastly, bonds can increase their credit rating by employing collateral or surety insurance. The credit ratings also play a crucial role in the assessment of insurance companies and other large corporations. Thus, the A/A2 rating doesn't just reflect financial robustness; it also denotes the capability to assure the investors and fulfill financial commitments effectively.
Understanding credit ratings, specifically the A/A2 rating, can prove to be a significant asset for investors. It offers a peek into the company's financial health and guides investors in making informed decisions. While the controversies surrounding the rating institutions serve as a reminder of the inherent risks, their role in the financial ecosystem remains pivotal.
Summary:
A — S&P / Fitch
A2 — Moody’s
Such ratings are given to bond issues and insurance companies, primarily, and this particular one is in the Upper Medium band of the Investment Grade ratings.
Investment grade bonds are considered to have a very low possibility of default. The ratings go up to AAA/Aaa and all the way down to DDD/D, with Investment Grade bonds being in the range of AAA/Aaa to BBB-/Baa3.
The A/A2 rating is considered Upper Medium Investment Grade.
The reason there are two ratings separated by a slash is that the major ratings institutions have different systems for their rankings, but these signify the same amount of risk. The companies that do the majority of the credit ratings on bonds and large companies are Fitch, Moody’s, and Standard & Poor’s (S&P).
Some have accused these institutions of pocketing large fees for performing the ratings while not actually protecting investors from the risks, since several large companies have held superior ratings up until the day they declared bankruptcy. On the other hand, these bankruptcies tended to be big surprises to everyone.
These ratings will determine how much of a yield a company will be expected to pay on a bond issue to compensate investors for the amount of risk they are taking. Bonds with higher ratings can have a low yield because they are perceived as secure investments.
Junk Bonds are those with a rating below BBB-/Baa3, and they are also called High Yield bonds because a company must pay a higher risk premium to compensate investors for the risk they take on.
Bonds can be backed by collateral or surety insurance to raise their ratings. Insurance companies and other companies are also evaluated using their credit ratings.