What are Credit Ratings?
ADI credit ratings are an estimate of the relative ability of an ADI to meet financial commitments, such as interest, dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested.
Agencies such as Fitch Ratings, Moody’s Investors Service and Standard & Poor’s issue both short-term and long-term credit ratings for ADIs based off qualitative and quantitative considerations that assess credit risk. Credit ratings do not directly address any risk other than credit risk, such as the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an ADI to pay upon a commitment.
Short Term Ratings
Short term ratings apply to an individual issuer’s capacity to repay all short-term fixed income obligations (less than one year). Ratings range from P-1/A-1+/F1+ (refer to chart for each agency’s rating scale) which are considered prime ratings, meaning the ADI has a superior ability to repay short-term debt obligations, to P-3/C meaning the ADI is not likely meet short-term debt obligations.
Long Term Ratings
Long term ratings are an estimation of how likely the ADI is to default on its long term (more than one year) financial obligations. Ratings range from Aaa/AAA (refer to chart for each agency’s rating scale), being of minimal credit risk, to C/D, being of high risk and likely to default.
An Aaa/AAA rating doesn’t guarantee a ADI won’t default, it just means that default is extremely unlikely.
All agencies also have ratings for ADIs that have already declared bankruptcy, are in receivership or have ceased business.
ADIs that do not have a credit rating
Credit ratings are not government mandated, ADIs must pay for a credit ratings from each issuer, so not all ADIs have a credit rating. Not having a credit rating does not signify an ADI is of higher risk.