Investment grade

The investment grade (or investment grade) is a credit rating category  that encompasses several types of  ratings with less likelihood of bankruptcy versus the non investment grade category. 

Therefore, it is the job of credit rating agencies to  rate a particular financial asset , company or State, and that it indicates a risk of bankruptcy ( default in English) or low or relatively low payment insolvency.

The adequate payment capacity to be considered investment grade for Moody’s is the Baa rating and for S&P and Fitch it is the BBB.

Investment grade categories

There are two categories of credit rating, investment grade and non investment grade, a high-risk, speculative grade and where the high yield category is found. The most important credit rating agencies worldwide are Moody’s, Standars & Poors and Fitch.

It is very important to distinguish between both categories, especially when investors (especially investment funds) have financial assets in their portfolio with a rating very close to the dividing line, because if an agency reduces the asset to a non-investment level, investors must dispose of same, selling it and causing waves of chain sales.

The investment grade categories that establish each of them are the following:

  1. Very strong payment capacity:For Moody’s the rating is Aaa and for S&P and Fitch is AAA.
  2. Strong payment capacity:For Moody’s the rating is Aa and for S&P and Fitch is AA.
  3. Good payment capacity:For all agencies it is A.
  4. Adequate payment capacity (There may be risks in the medium / long term):For Moody’s the rating is Baa and for S&P and Fitch is BBB.

These notes are of great importance for investors when it comes to investing in financial markets and in some cases they can be very relevant in fear of investing in them. Credit rating agencies are organizations of great economic influence worldwide.

Within these categories mentioned above there are subcategories, depending on the type of issue and the issuer in question. For example, it will not be the same nor will it have the same security in the payment of an issuance of a small business bond as of a sovereign bond or of a State. The small company will have a lower credit rating and the yield of the bond will be higher, because it will have to compete in profitability to be more attractive in its placement and, therefore, being a higher risk asset, investors will demand a higher return. On the other hand, the credit rating is very important to value a financial asset as it will directly influence its risk premiumIf its valuation is not good, the risk premium will skyrocket and, therefore, investors will demand a higher return to assume that risk.

Analysis of credit rating agencies

The rating agencies analyze the accounts and economic balances of Banks, States, Insurance Companies and all types of financial products. They carry out an analysis of, for example, the level of debt, equity, own resources , payment histories, financial models of amortization, foreign financing and own financing, the level of leverage . At the same time, it must be taken into account that their clients are the companies they analyze and, thus, after the crises of 2008 their lack of credibility and degree of independence in their evaluations were uncovered.

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