Photo: Investopedia

By THÉRÈSE MARGOLIS

In school, a strong B across the board is considered to be a respectable grade.

In the world of financial credit ratings, not so much.

Although the way that each of the Big Three rating agencies — Standard and Poor´s (S&P), Moody’s Analytics and Fitch Ratings, which collectively account for 99 percent of the world’s ratings market — grade a stock, company or country varies somewhat from agency to agency, the general concept is the same, and runs the gamut from AAA (or A++), which is an excellent, or prime, grade, to D, which means the corporation in question is currently in default.

All the grades in between cover varying degrees of creditworthiness.

But before going into what each of the lettered grades stands for, it is important to understand what exactly a credit rating agency does.

Basically, a rating agency determines whether or not a company or nation is worthy of credit, in other words, if they are a good bet for a loan.

Taking into account a broad range of issues, such as the corporation’s or country’s existing debt, sources of revenues, current market demands, investment in development, future economic potential and past history of compliance with financial obligations, a credit agency determines how likely an investor or lender to that entity is to profit from their investment or get their loan paid back by the debtor.

The rating issued by an agency, then, is a quantified assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation.

Credit ratings determine not only whether or not a borrower will be approved for a loan or debt issue, but also the interest rate at which that loan will need to be repaid.

A credit rating or score can be assigned to any entity that seeks to borrow money — an individual, a corporation, a state or provincial authority or a sovereign government.

All three big credit ratings use a letter-based system in grading companies and governments.

A high credit rating (an A or above) means that the agency considers that the entity has a strong probability of paying back a loan in its entirety without any issues.

Conversely, an extremely poor credit rating (a C or below) means that the borrower has had trouble paying back loans in the past and will probably follow the same pattern in the future.

So what about the grades in between?

Again, there is some discrepancy between how S&P, Moddy’s and Fitch determine a particular letter grade, but in general, prime grades are reserved for AAAs; AA- through AA+ are considered high grades; A- through A+ are deemed upper medium grades; and BBB- through BBB+ are lower medium grades.

Once a rating goes below a triple B (B+ through BB+), the company or government in question is considered to be “noninvestment grade” and/or highly speculative.

All C grades — from CCC+ to plain old C — are viewed as poor investments or borrowers and are considered as extremely speculative and representing substantial risks.

And a debt instrument with a rating below BB is considered to be a highly speculative grade, or “junk,” which means it is likely to default on a loan.

Hence, the fact that S&P issued a BBB rating for Mexico on Tuesday, June 15, means that it considers the country’s creditability to be below a middle-grade rating and just shy of junk.

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