Just like individuals, businesses and corporations are given credit ratings based on a variety of factors. Receiving a AAA credit rating indicates that the business has the highest possible creditworthiness and is of low risk to investors. Many companies strive to get a AAA credit rating by reducing debt and improving overall performance.
A corporate credit rating is really a measure of the ability and readiness of a company to repay its debts. They may be issued in regards to both short- and long-term debt obligations, but experts suggest that the long-term credit rating may be more indicative of the health of the country. Grades range from AAA to either C or D, depending on the rating agency. While an AAA credit rating is given to the few companies seen as having the highest ability to pay off debts, a low C or D rating can mean that the company is in default and totally unable to repay any debts.
Credit ratings are determined by one of three major agencies that provide ratings guides for the whole financial industry. These companies are known as Moody's®, Standard&Poor's®, and Fitch Ratings®. Worldwide, the ratings given by these companies are used by nearly every form of investor to divine which companies are worthy investments, and which are speculative or high-risk. Although the ratings from all three groups may not be identical, they are typically very close to one another as they use similar rating criteria.
While an AAA credit rating is not a determination of whether to buy or sell stock or invest in a company, it is often used to influence market trading. Companies with the lowest long-term risk usually need to have a clear record of profits and good performance, in order to keep up with debts. In generally, investing in any company with a rating below BBB is considered to be buying speculative or “junk” bonds. These can return incredible profits if markets turn in their favor, but also provide higher risk levels of loss and even company default.
A AAA credit rating is a very rare designation. According to one ratings agency, in 2010 only 18 financial companies and four non-financial companies in the United States qualified for a AAA credit rating. Since the financial crashes of 2008, most countries have seen a similar decline in top-rated businesses.
Some ratings agencies also award what are known as sovereign credit ratings to nations based on similar criteria used for corporations. These ratings measure a country's ability to repay debts, and are used as a measure of fiscal health and lending risk. Impacted by the financial crash of 2008, rating agencies have warned that many nations with long-standing AAA credit rating scores may be in danger of being downgraded without spending reductions.
