A credit rating is an assessment of a borrower’s credit worthiness - or their ability to repay a debt or their likelihood of defaulting. Independent bodies called credit rating agencies assess borrowers to decide their credit rating.
A credit rating may provide an investor with one indicator as to the relative risk of investing in an interest rate security. In general terms, the lower the credit rating, the greater the risk to the investor. When considering the credit rating on an interest rate security, an investor should look at both the credit rating of the issuer and the credit rating of the security themselves.
Credit ratings can be either long-term or short-term. Short-term ratings relate to obligations with an original maturity of 365 days or less - including commercial paper. Long-term ratings – relate to financial obligations with a term of more than one year. The long-term rating generally addresses the period out to three to five years.
Exchange-traded Australian Government Bonds ("AGBs") are bonds issued by the Australian Government. They have one of the lowest credit risks because the Australian Government has the obligation to pay the coupon and principal. AGBs are likely to be suitable for investors seeking a stable and secure investment although the rate of return may be lower than other bonds with greater risk.
If a company is unrated, it does not necessarily mean that its interest rate securities are high risk, but it does mean that investors will have to turn to other means to evaluate its financial strength. An investment adviser or broker may be able to assist with company research data.
- Rating methodology used by Australia Ratings
- Example of credit rating report provided by Australia Ratings for Australian Unity notes (ASX Code AYUHA)
- ASIC regulation of credit rating agencies in Australia.