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
The credit ratings assigned by Australia Ratings on selected securities are their opinion of the creditworthiness of the issuer of the security and are based on publicly available information at a point in time. It follows an alphabetical indicator of ‘AAA’, ‘AA’, ‘A’, ‘BBB’ etc. For example, the Australian Government as Issuer of AGBs – Treasury Bonds and Treasury Index Bonds, is assigned a credit rating of “AAA” which is the highest credit rating that can be assigned.
A Product Complexity Indicator (PCI) is a colour coded indicator based on the complexity and terms and conditions of a security. Factors include the specific debt obligations of the issuer such as seniority of debt, likelihood of recovery on company’s assets and rights of the company to vary terms and conditions. For example, all Treasury Bonds issued by the Australian Government have a PCI of GREEN which implies the terms are simple and straightforward.
Credit Ratings are not a recommendation to buy, sell or hold a particular security.
Find out more
- Rating methodology used by Australia Ratings
- ASIC regulation of credit rating agencies in Australia
- Guide to naming conventions and security descriptions to understand what the security description means.