Investment Grade Credit Rating Details: What Does It Mean? (2024)

What Is Investment Grade?

An investment grade is a rating that signifies a municipal or corporate bond presents a relatively low risk of default. Bond rating firms like Standard & Poor’s (S&P), Moody's, and Fitch use different designations, consisting of the upper- and lower-case letters "A" and "B," to identify a bond's credit quality rating.

"AAA" and "AA" (high credit quality) and "A" and "BBB" (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ("BB," "B," "CCC," etc.) are considered low credit quality and are commonly referred to as junk bonds.

Key Takeaways

  • An investment grade rating signals that a corporate or municipal bond has a relatively low risk of default.
  • Different bond rating agencies have different rating symbols to signify investment grade bonds.
  • Investors and analysts commonly look at grades from rating agencies like Standard & Poor's, Moody's, and Fitch.

Investment Grade Credit Rating Details: What Does It Mean? (1)

How Investment Grade Works

Individuals and businesses are given credit ratings based on their credit histories. Lenders use these ratings to decide whether they will do business with and extend credit to potential borrowers. Similarly, investments are given credit ratings that lenders and investors can use to determine whether they want to invest in them.

Grades work just like credit scores for consumers and companies. An investment grade credit rating indicates a low risk of a credit default, making it an attractive investment vehicle, especially for conservative investors. A speculative grade, on the other hand, is the opposite of an investment grade. This grade indicates that the investment comes with a greater degree of risk.

Ratings are given to investments by different agencies, including S&P, Moody's, and Fitch. How they are rated varies based on the agency. For instance:

  • hands out letter grades with plus (+) and minus (-) suffixes. Triple-letter ratings are higher, followed by double-letter ratings, then single-letter ratings.
  • Moody's rates investments with triple-letter ratings as the highest, followed by those with a combination of letters and numbers.
  • The Fitch rating scale is similar to that of S&P's

We go into more detail on these ratings and their scales below.

Special Considerations

Investors should note that U.S. government bonds, also known as Treasuries, are generally granted the highest possible credit quality rating. In the case of municipal and corporate bond funds, a fund company's literature, such as its fund prospectus and independent investment research reports, reports an "average credit quality" for the fund's portfolio as a whole.

In August 2023, Fitch downgraded the credit rating for the United States, moving it from a AAA rating to AA+. The agency cited potential issues with the country's fiscal condition over the next three years because of the political climate. According to Fitch,

"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management."

Fitch also stated that shocks to the economy related to tax cuts and increased government spending are raising the national debt, which could be problematic for the country's ability to pay its bills.

Many institutional investors have a rigid policy of limiting their bond investments solely to investment grade issues.

Investment Grade Credit Rating Details

Investment grade issuer credit ratings are those rated at least BBB- (S&P, Fitch) or Baa3 (Moody's). The exact ratings depend on the credit rating agency.

Standard & Poor's (S&P)

Investment grade credit ratings include:

  • AAA
  • AA+
  • AA
  • AA-

Companies with any credit rating in this category boast a high capacity to repay their loans; however, those awarded a AAA rating stand at the top of the heap and are deemed to have the highest capacity of all to repay loans.

The next category down includes the following ratings:

  • A+
  • A
  • A-

Companies with these ratings are considered to be stable entities with robust capacities for repaying their financial commitments. However, such companies may encounter challenges during deteriorating economic conditions.

The bottom tier of investment grade credit ratings delivered by Standard and Poor's include:

  • BBB+
  • BBB
  • BBB-

Companies with these ratings are widely considered to be speculative grade and are even more vulnerable to changing economic conditions than the prior group. Nevertheless, these companies largely demonstrate the ability to meet their debt payment obligations.

Moody's

According to Moody's, investment grade bonds comprise the following credit ratings:

  • Aaa
  • Aa1
  • Aa2
  • Aa3
  • A1
  • A2
  • A3
  • Baa1
  • Baa2
  • Baa3

The highest-rated Aaa bonds possess the least credit risk of a company's potential failure to repay loans. By contrast, the mid-tier Baa-rated companies may still have speculative elements, presenting high credit risk—especially those companies that paid debt with expected future cash flows that failed to materialize as projected.

Fitch

As noted above, Fitch ratings are similar to those issued by S&P. Investment grade ratings are as follows:

Fitch Investment Grade Ratings
RatingWhat it MeansGiven to
AAAHighest credit qualityEntities with exceptionally high quality (established, with consistent cash flows)
AAVery high credit qualityThose with high quality and low default risk.
AHigh credit qualityEntities with some business or economic vulnerability but low default risk
BBBGood credit qualityThose with higher degree of business or economic vulnerability but a low expectation of default

Downgrading From Investment Grade

Investors should be aware that an agency downgrade of a company's bonds from "BBB"' to "BB" reclassifies its debt from investment grade to junk status. Although this is merely a one-step drop in credit rating, the repercussions can be severe.

The drop to junk status telegraphs that a company may struggle to pay its debts. The downgraded status can make it even more difficult for companies to source financing options, causing a downward spiral as costs of capital increase.

What Is Investment Grade vs. High Yield?

High yield bonds are generally considered higher risk than investment grade bonds. High yield bonds, however, tend to offer a higher return—to compensate for the higher risk of default of the issuer.

What Is Considered Investment Grade?

Investment grade is considered to be rated BBB- or higher for Fitch and S&P Global. Investment grade for Moody’s is considered Baa3 or higher.

What Are AAA Bonds?

Bonds that are rated AAA have the highest possible rating. The issuers of these bonds have the highest creditworthiness and are expected to easily meet financial obligations. AAA bonds have the lowest risk of default.

The Bottom Line

Credit ratings help banks, lenders, and financial institutions decide how likely consumers and businesses are to repay their debts using credit scores. Similarly, investors can determine whether to put their money into certain investments based on ratings by agencies like S&P, Moody's, and Fitch. The higher the grade, the safer the investment. Investments with lower ratings have a greater risk of default. Keep in mind that ratings can go up and down based on financial and economic conditions, so it's always a good idea to keep up-to-date with the news and your portfolio.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.

  1. Fidelity. "Bond Ratings."

  2. Fidelity. "Bond Ratings."

  3. Fitch Ratings. "Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable."

  4. The Organization for Economic Cooperation and Development. "Corporate Bond Market Trends, Emerging Risks and Monetary Policy." Page 13.

  5. S&P Global. "S&P Global Ratings Definitions."

  6. Moody's Investor Service. "What Is a Credit Rating?"

  7. Fitch Ratings. "Rating Definitions."

  8. Financial Industry Regulatory Authority. "What To Know Before Saying Hi to High-Yield Bonds."

  9. U.S. Securities and Exchange Commission. "Updated Investor Bulletin: the ABCs of Credit Ratings."

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Investment Grade Credit Rating Details: What Does It Mean? (2024)

FAQs

Investment Grade Credit Rating Details: What Does It Mean? ›

Investment grade refers to the quality of a company's credit. To be considered an investment grade issue, the company must be rated at 'BBB' or higher by Standard and Poor's or 'Baa" or higher by Moody's. Anything below these 'BBB' or 'Baa" ratings are considered non-investment grade.

What are investment grade credit ratings? ›

Investment-grade refers to bonds rated Baa3/BBB- or better. High-yield (also referred to as "non-investment-grade" or "junk" bonds) pertains to bonds rated Ba1/BB+ and lower.

Why investment grade credit? ›

Investing in high quality investment grade and BB-rated credits allows for more diversification across issuers. For example in our Global Credits – Short Maturity strategy we invest in more than 130 different companies across the global investment grade credit market.

What does minimum investment grade rating mean? ›

Minimum Investment Grade Rating means that Guarantor's Affiliate has a minimum credit rating on its senior unsecured debt securities of at least two (2) of the following ratings: (i) BBB- as determined by Standard & Poors Corporation, (ii) Baa3 as determined by Xxxxx'x Investor Service, Inc., or (iii) a comparable ...

Is AAA credit rating better than AA+? ›

The AA+ rating is issued by S&P and Fitch and is similar to the Aa1 rating issued by Moody's. This rating is still of high quality but it falls below the AAA ranking. It comes with very low credit risk even though long-term risks may affect these investments.

Which airlines have an investment grade credit rating? ›

Qantas joins only six other airlines in the world currently with an investment grade rating from S&P – Air New Zealand, Lufthansa, Southwest Airlines, Alaska Airlines, Ryanair, and WestJet. Credit ratings are an opinion on the ability and willingness of a borrower to meet its financial obligations.

What is the minimum credit rating by S&P for an investment grade? ›

In S&P Global Ratings long-term rating scale, issuers and debt issues that receive a rating of 'BBB-' or above are generally considered by regulators and market participants to be “investment-grade,” while those that receive a rating lower than 'BBB-' are generally considered to be “speculative-grade.”

How does investment credit work? ›

Investment credits are similar to investment allowances, which permit businesses to deduct a specified percentage of certain capital costs from their taxable income.

Which rating is better, BB or BBB? ›

'BBB' National Ratings denote a moderate level of default risk relative to other issuers or obligations in the same country or monetary union. 'BB' National Ratings denote an elevated default risk relative to other issuers or obligations in the same country or monetary union.

What is a good credit investment? ›

Credit ratings of AAA/Aaa to BBB/Baa are considered investment grade while BB/Ba and lower. are referred to as high yield. Due to the premium coupons they pay investors in return for the increased risk of default, high yield bonds play a major role in the alternative credit space.

What defines below investment grade? ›

Meaning of below investment grade in English

if shares or bonds are below investment grade, there is a risk that they may lose value or not be paid back: The market values of securities rated below investment grade tend to be more sensitive to changes in economic conditions than higher-rated securities.

What is the Morningstar investment grade rating? ›

The Morningstar risk rating is a ranking given by research firm Morningstar to publicly traded mutual funds and exchange traded funds (ETFs). A score of 5 is given to the best risk performers, with a 1 to the worst. Morningstar ratings are based on the fund's historical performance compared to other like funds.

What is the default rate for investment grade bonds? ›

The average annual default rate for investment-grade corporates is about 14 basis points. Excluding the great depression era, the average default rate is about 5.84 basis points. In general, the likelihood of default for an investment grade bond (the so- called fallen angle) is low.

Why did the US lose triple A rating? ›

1, the U.S. Treasury owed $32.6 trillion, both to bondholders and other parts of the federal government. That's part of the reason that Fitch cut the U.S. government's long-term creditworthiness by one notch, from AAA – its highest rating – to AA+.

What is Apple's credit rating? ›

S&P Global Ratings affirms Apple at "AA+" (Local Currency LT credit rating); outlook stable.

What is the current US credit rating? ›

Fitch Affirms the United States at 'AA+'; Outlook Stable. Fitch Ratings - New York - 01 Mar 2024: Fitch Ratings has affirmed the United States of America's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA+' with a Stable Outlook.

What is the difference between investment grade and high yield rating? ›

There is a dividing line: bonds with good credit ratings of at least 'BBB –' are classed as investment grade bonds, while those below 'BBB–' are treated as high yield bonds (also known as speculative or junk bonds).

Is AAA an investment grade? ›

Fitch's credit rating scale for issuers and issues is expressed using the categories 'AAA' to 'BBB' (investment grade) and 'BB' to 'D' (speculative grade) with an additional +/- for AA through CCC levels indicating relative differences of probability of default or recovery for issues.

What do the S&P ratings mean? ›

The S&P rating scale focuses primarily on the likelihood that a company, city or country is headed for default, which is somewhat different than ratings from the other two “Big Three” companies, Moody's and Fitch Group. Each of the three companies uses its own scale to determine financial stability.

What is the difference between Moody's and S&P ratings? ›

Moody's rates long-term debt using a descending scale of upper- and lowercase letters combined with numbers, ranging from Aaa to C. Standard & Poor's uses uppercase letters with occasional emphasis from plus or minus signs to evaluate bonds.

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