Credit Ratings | ||||||||||||||||||||||||||||
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On this page About credit ratings and fixed income investments What makes any fixed income investment attractive is the return it offers. As an investor in fixed income assets you are the lender of funds to the issuer of the securities. When the issuer of the security is a government or state government authority an investor can be very confident of receiving all the promised interest payments and the face value back from the issuer upon maturity. Other issuers need to be subjected to a creditworthiness investigation from prospective investors before any money is lent to them. The Australian ratings firm Standard and Poors Australia is in the business of providing investors with detailed analysis of corporations’ ability to repay debt and interest. S&P actually assigns a rating based on their analysis of an institution’s ability to repay debt. Each issuer’s relevant market sector attributes are scrutinised under this evaluation process. The ratings that are assigned for debt markets are split into two categories. There is a short-term classification and a long-term classification. The ratings and their definitions are below for your reference. It is a good idea to visit the S&P website to get a full understanding of that company’s charter. Moody’s rating agency also provides a full coded ratings system for investors. S&P regularly conduct reviews of their own rating performance and they constantly monitor existing ratings and alert investors if changes are on the horizon. The lower the rating (the higher the risk of default), the higher the cost of funds for the issuer and the higher the yield for the investor. Australian government bonds are rated AAA domestically by S&P, as they are extremely secure and liquid assets. Standard & Poor’s short-term ratings and what they mean
Standard & Poor’s long-term ratings and what they mean Ratings from AAA to BBB are termed Investment grade assets.
Non-investment grade This group of assets is regarded as speculative and requires sophisticated credit analysis by any investor considering it.
Ratings in context Each category has a + or - subcategory to differentiate between issuers rated at the upper and lower ends of the scale. For example A+, BBB-, AA- etc. These ratings help investors to compare the relative risks of investing in bonds and to compare the relative returns to establish what is good value. Some companies choose not to obtain ratings for their issues. A credit rating does not insure you against any risk of default as every contingency cannot be taken into account when a rating is assigned, e.g, an act of god. But it is a very reliable guide to interest rates for where the various issues should be trading. In every case investors should only invest in securities where they have established the underlying risk of the issuer and familiarised themselves with it. Fixed income assets are not all senior debt issues. Some of the debt being issued is what is called subordinated. This refers to debt that ranks behind the depositor or other lenders to that institution and in front of the shareholders. This type of debt will form part of the issuer’s capital base. These assets can be quite complex and will offer better returns than the normal senior debt offers because of where it stands on the capital curve. S&P also assigns ratings to these issues. Building societies and credit unions are not assigned ratings by S&P. They are approved to take deposits by APRA which is the Australian Prudential Regulatory Authority and as such must comply with the guidelines placed on them. APRA also oversees Australian banks compliance to the prudential guidelines it has imposed to ensure depositors protection. Please take a look at the APRA web site for a more detailed explanation of the requirements placed on these institutions. These institutions are generally in the business of lending money to mums and dads secured against residential property. Most of the mortgages are insured and have responsible LVRs. This makes building societies and Credit Unions viable alternatives to the normal Bank options. The building Societies and Credit Unions usually offer better deposit rates than the banks because of their non-rated status. |