Credit Rating Scales Cheat Sheet
Investment Grade Ratings
| Quality | S&P / Fitch | Moody’s | Description |
|---|---|---|---|
| Highest quality | AAA | Aaa | Extremely strong capacity to meet obligations. Very rare — only a few issuers globally |
| High quality | AA+ | Aa1 | Very strong capacity; differs from AAA by a small degree |
| AA | Aa2 | ||
| AA− | Aa3 | ||
| Upper medium | A+ | A1 | Strong capacity but somewhat susceptible to adverse economic conditions |
| A | A2 | ||
| A− | A3 | ||
| Lower medium | BBB+ | Baa1 | Adequate capacity; adverse conditions could weaken ability to pay |
| BBB | Baa2 | ||
| BBB− | Baa3 | Lowest investment grade — one notch above junk |
Below Investment Grade (High Yield / Junk)
| Quality | S&P / Fitch | Moody’s | Description |
|---|---|---|---|
| Speculative | BB+ | Ba1 | First junk tier — less vulnerable near-term but faces ongoing uncertainties |
| BB | Ba2 | ||
| BB− | Ba3 | ||
| Highly speculative | B+ | B1 | Currently meeting obligations but vulnerable to adverse business/financial conditions |
| B | B2 | ||
| B− | B3 | ||
| Substantial risk | CCC+ | Caa1 | Currently vulnerable; depends on favorable conditions to meet obligations |
| CCC | Caa2 | ||
| CCC− | Caa3 | ||
| Extremely speculative | CC | Ca | Highly vulnerable; default is a real possibility |
| Default imminent | C | C | Default or default-like process has begun |
| In default | D | / | Issuer has failed to pay (S&P/Fitch only; Moody’s withdraws rating) |
Historical Default Rates by Rating (10-Year Cumulative)
| Rating (S&P) | 10-Year Default Rate | Interpretation |
|---|---|---|
| AAA | ~0.5% | Near-zero default risk over a decade |
| AA | ~0.7% | Extremely safe; minimal credit risk |
| A | ~1.5% | Low risk but not negligible over long horizons |
| BBB | ~3.5% | Moderate risk — the most closely watched boundary |
| BB | ~9% | Meaningful default risk; credit spreads widen significantly |
| B | ~22% | About 1 in 5 default within 10 years |
| CCC/CC | ~45%+ | Near coin-flip odds of default over a decade |
Rating Modifiers and Outlook
| Modifier | Agency | Meaning |
|---|---|---|
| + / − | S&P, Fitch | Relative standing within a rating category (e.g., A+ is stronger than A−) |
| 1 / 2 / 3 | Moody’s | Same concept: 1 = top, 2 = middle, 3 = bottom of category |
| Positive Outlook | All three | Rating may be upgraded in the next 6–24 months |
| Negative Outlook | All three | Rating may be downgraded in the next 6–24 months |
| CreditWatch Positive | S&P | Potential upgrade under review — typically resolved within 90 days |
| CreditWatch Negative | S&P | Potential downgrade under review — more immediate than outlook change |
| Rating Under Review | Moody’s | Moody’s equivalent of CreditWatch — actively reconsidering the rating |
Key Investment Grade vs. Junk Differences
| Factor | Investment Grade (BBB− / Baa3 and above) | High Yield / Junk (BB+ / Ba1 and below) |
|---|---|---|
| Investor base | Insurance companies, pension funds, banks | Hedge funds, high-yield mutual funds, CLOs |
| Typical spread over Treasuries | 50–200 bps | 300–800+ bps |
| Index inclusion | Bloomberg US Aggregate, most bond indices | Excluded from IG indices; own HY indices |
| Regulatory treatment | Lower capital charges for bank holdings | Higher capital charges; some institutions can’t hold |
| Fallen angel impact | — | Forced selling when IG bonds are downgraded to junk creates price dislocations |
Key Takeaways
- S&P/Fitch use letters with +/−; Moody’s uses letters with 1/2/3 — they map directly to each other
- BBB−/Baa3 is the lowest investment grade rating — the single most important threshold in credit
- Default rates jump dramatically below investment grade: ~3.5% for BBB vs. ~22% for B over 10 years
- Outlook and CreditWatch signals often precede actual rating changes by months
- “Fallen angels” (IG downgraded to junk) create forced selling that can present value opportunities
Frequently Asked Questions
What is the difference between investment grade and junk bonds?
Investment grade bonds are rated BBB−/Baa3 or higher and represent issuers with relatively low default risk. Junk bonds (high yield) are rated BB+/Ba1 or lower and carry significantly higher default risk — but compensate investors with higher yields. The distinction matters because many institutional investors are restricted to investment grade only.
Why do the three agencies sometimes give different ratings?
Each agency uses its own methodology, data sources, and analytical frameworks. S&P and Fitch tend to be more aligned since they use similar scales, while Moody’s emphasizes expected loss (probability × severity) rather than just probability of default. Split ratings are common and aren’t necessarily a problem — they reflect different analytical perspectives.
What happens when a company gets downgraded?
A downgrade typically causes the bond’s price to drop and its yield to rise as the market demands more compensation for increased risk. The impact is most severe when crossing the IG/junk boundary because institutional investors may be forced to sell. Downgrades also increase borrowing costs for the issuer on future debt issuances.
How reliable are credit ratings?
Credit ratings are useful directional indicators — higher-rated bonds default less frequently than lower-rated ones, and the rank ordering is consistent over time. However, ratings are backward-looking and slow to react. The 2008 financial crisis exposed major failures in rating structured products. Use ratings as one input alongside your own credit analysis, not as a substitute.
What is a fallen angel?
A fallen angel is a bond originally issued as investment grade that gets downgraded to junk status. When this happens, index funds tracking IG benchmarks and institutional investors restricted to IG must sell, creating artificial selling pressure. Fallen angels often outperform original-issue junk bonds over time because the forced selling pushes prices below fair value.