What Does an Investment Grade Credit Rating Mean?

An investment-grade credit rating means a low chance that a municipal or business bond will not be paid back. Bond rating companies like Standard & Poor’s (S&P), Moody’s, and Fitch use different terms, which are made up of the capital and lowercase letters “A” and “B,” to show how creditworthy a bond is.

“A” and “BBB” are investment grade, which means they have a high credit rating. “AAA” and “A.A.” are also high credit ratings. Bonds with credit ratings below these (“B.B.,” “B,” “CCC,” etc.) are thought to have lousy credit quality and are often called “junk bonds.”

How the Investment Grade Test Works

Credit scores are given to people and companies based on their credit histories. Lenders use these scores to decide if they want to do business with a potential borrower and give them credit. In the same way, investments have credit scores that investors and lenders can use to decide if they want to put money into them.

Grades are like credit scores for both people and businesses. An “investment grade” credit rating means a low chance that the debt will not be paid back. This makes the credit attractive as an investment, especially for cautious buyers. On the other hand, a speculative grade is not the same as an investment grade. You should know that this grade means the investment has a higher level of danger.

Several organizations, such as S&P, Moody’s, and Fitch, rate assets. The way each service rates them is different. As an example:

The letter scores S&P gives have a plus (+) and minus (-) sign at the end. The best ratings are triple-letter ones, double-letter ratings, and finally single-letter scores.

Moody’s gives the best investment scores with three letters in their rating. Next come investments that have a mix of letters and numbers.

The rating system that Fitch employs is comparable to that of S&P.

We’ll talk about these grades and their scales in more depth below.

Unique Things to Think About

Investors need to know that U.S. government bonds, called Treasury bonds, usually get the best credit rating possible. According to the fund company’s literature, such as its fund prospectus and independent investment research studies, there is “average credit quality” for the fund’s portfolio as a whole in municipal and corporate bond funds.

Fitch lowered the United States’ credit rating, such as from AAA to AA+, in August 2023. The agency said the political environment could cause problems with the country’s finances over the next three years. From what Fitch says,

“Repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.”

Fitch also said that the national debt is increasing because of economic changes caused by tax cuts and increased government spending. This could make it harder for the country to pay its bills.

There is a strict rule among many institutional investors that they can only put in investment-grade bonds.

Information on the investment grade credit rating

Ratings for issuers above BBB or Baa are considered investment grade. The exact scores depend on the company that gives them.

Highest and Best (S&P)

Credit scores that are good for investments include:

• AAA
• AA+
• AA
• AA-

Companies with any credit rating in this group are thought to have a high ability to repay their loans. However, companies with an AAA rating are thought to have the best ability to repay their loans.

The following ratings are in the next group down:

• A+
• A
• A-

People think companies with these scores are stable and can reliably repay their debts on time. However, these kinds of businesses may face problems when the economy is terrible.

Standard and Poor’s gives the following credit ratings the lowest possible score for investment grade:

• BBB+
• BBB
• BBB-

Many people think that companies with these scores have speculative grades and are even more vulnerable to economic changes than those in the previous group. Still, these businesses mostly show they can meet their debt payment responsibilities.

The Moody’s

Moody’s says that the following credit grades make up investment-grade bonds:

• Aaa
• Aa1
• Aa2
• Aa3
• A1
• A2
• A3
• Baa1
• Baa2
• Baa3

AAA bonds have the lowest credit risk, meaning there is a minimal chance that a company won’t be able to return its loans. The mid-tier Baa-rated companies, on the other hand, may still have speculative parts, which makes them a high credit risk. This is especially true for companies that took on debt based on predicted future cash flows that did not materialize as planned.

I Fitch

As was already said, Fitch ratings are like S&P ratings. These are the investment grade ratings:

Reducing the grade from an investment agency’s

A downgrade of a company’s bonds from ‘BBB’ to agency changes the debt from investment grade to trash status. These investors should be aware of this. Even though this is only a tiny drop in credit score, it can have nasty effects.

When a company’s standing drops to “junk,” it might be unable to pay its debts. Companies may find it even harder to get financing after being downgraded, which can lead to a downward loop as the cost of capital rises.7

What’s the Difference Between High Yield and Investment Grade?

Most of the time, high-yield bonds are seen as riskier than investment-grade bonds. They tend to offer a higher return because of the higher chance of default on high-yield bonds.7

What does “investment grade” mean?

For Fitch and S&P Global, an investment grade rating is BBB or better. Moody’s says that an investment grade is Baa3 or better.1

What do AAA bonds mean?

Bonds with the rating AAA have the best grade possible. The people who issued these bonds are very creditworthy, so it’s likely that they will be able to pay their debts. AAA loans are the least likely to go wrong.8

Conclusion

• An investment grade rating means there is a low chance that a business or municipal bond will not be paid back.
• Different bond rating companies mark investment-grade bonds with different rating symbols.
• Rating companies like Standard & Poor’s, Moody’s, and Fitch give grades that investors and analysts often look at.