The Best Bond Rating

Rating agencies use differing nomenclature

The best bond rating is a function of current credit strength and the ability to maintain credit quality in the future. Agencies commonly create bond ratings for both the short-term ability to pay, and long-term outlook for interest rates and the economy. The major rating agencies are Moody's, Standard and Poor's, and Fitch. Other rating agencies review specific kinds of securities in specialty markets.

Standard and Poor's

The highest bond rating is AAA for long-term bond ratings issued by Standard and Poor's. The agency generally groups its investment ratings into ten categories from lowest to highest. The highest category rating is Prime and AAA is the only rating in the Prime category. The A-1+ rating is the best short-term rating available to issuers. It is common for short-term ratings to be higher than the long-term rating, depending on the particular security pledged to back the bond. Countries, states and companies all employ the same rating system.

Fitch

The rating system employed by Fitch is very similar to the rating system employed by Moody's. Fitch recognizes nine groups of ascending ratings, including a long-term category of securities of which only a AAA rating is given. The best short-term bond rating is the F1+, which signifies that there is ample balance sheet cash and assets available to pay debt service. The long-term bond rating requires a strong balance sheet, but also makes provision for the exceptional outlook for the industry niche, low outstanding debt and the ability of management to increase cash flow.

Moody's

Moody's rating system employs a Aaa as the best rating for long-term securities. The best rating for short-term securities is P-1. Moody's ratings, like Fitch, and Standard and Poor's, are based on the entire balance sheet and prospects for a company. Recognizing that time will create unfavorable challenges to the issuer that could generally affect a rating, the likelihood of a failure from both cash flow and assets is remote.

Best Bond Ratings

Best bond ratings are not meant to be guarantees that a company will continue to be "gilt edged." In fact, ratings can, and often do change during the time the bonds are outstanding. The agencies base the best short-term ratings primarily on the company's immediate cash flow and cash on hand. Investors should consider the difference between the best bond ratings and investment-grade ratings. The difference in yield may compensate the investor for the additional risk.

References

• Moody's
• FitchResearch
• Standard & Poor's

Resources

• NYSE Euronext: Glossary