What is a credit rating?
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 a bond or hybrid security. In general terms, the lower the credit rating, the greater the risk to the investor. When considering the credit rating on a bond or hybrid security, an investor should look at
- the credit rating of the issuer;
- the complexity of the product; and
- the credit rating of the security.
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 or the security's complexity. An investment adviser or broker may be able to assist with company research data.
Assigning credit ratings and product complexity indicators
Australia Ratings assigns credit ratings and product complexity indicators on ASX listed bonds. Find out more by clicking on the links below:
- Australia Ratings and Rating Reports for ASX listed bonds
- Rating methodology used by Australia Ratings
- ASIC regulation of credit rating agencies in Australia.