Tuesday, 9 August 2011

Two 'A's is not Enough

If we get an A for exam or a project, we will be very happy. If we get AA, then we will have party. If we get AA+, then we will definitely fly to the sky.

United States credit rating gets AA+, but the stock is down like hell. Why? It is actually a downgrade from AAA to AA+ by Standard & Poor's. Still not bad what, at least still got 2 "A"s and a "+".... but apparently I still need to learn economy a lot.

What is credit rating, and how do people rate it? Here is some info from Wikipedia.


A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by credit rating agency of the debt issuers likelihood of default. Credit ratings are determined by credit ratings agencies. 

The credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. 

Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use their judgment and experience in determining what public and private information should be considered in giving a rating to a particular company or government. 

The credit rating is used by individuals and entities that purchase the bonds issued by companies and governments to determine the likelihood that the government will pay its bond obligations.

A poor credit rating indicates a credit rating agency's opinion that the company or government has a high risk of defaulting, based on the agency's analysis of the entity's history and analysis of long term economic prospects.

Credit rating are assigned by credit rating agencies such as A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letter designations such as A, B, C. 

The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond. 

 The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C. 

A. M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S. 

The CTRISKS rating system is as follows: CT3A, CT2A, CT1A, CT3B, CT2B, CT1B, CT3C, CT2C and CT1C. All these CTRISKS grades are mapped to one-year probability of default.

Long-term Short-term  
AAA A-1+ Prime
AA+ High grade
A+ A-1 Upper medium grade
A- A-2
BBB+ Lower medium grade
BB+ B Non-investment grade
B+ Highly speculative
CCC+ C Substantial risks
CCC Extremely speculative
CCC- In default with little
prospect for recovery
D / In default

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