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Credit Rating & Downgrades

An agency's assessment (Moody's, S&P, Fitch) of how likely a borrower is to repay, from AAA (safest) to D (in default). A downgrade can force some investors to sell.

Key points

  • Investment grade: BBB- (Baa3) or higher; high yield: BB+ (Ba1) or lower.
  • A downgrade to high yield can force selling by funds only allowed to hold investment grade.
  • Bond prices often move before the agencies act, because investors react to news first.

Example

If a BBB-rated company is cut to BB, its spread might widen by 100-200 bps; for a bond with a duration of 6, that is a price fall of roughly 6-12%.

In history

In 2020 several large companies, including Ford and Occidental Petroleum, were cut from investment grade to high yield. Some already-weak borrowers, such as Hertz and J.C. Penney, filed for bankruptcy.

Related terms