Credit Ratings Explained

Three agencies dominate the business of grading borrowers who issue public debt: S&P, Moody's & Fitch. They all came into existence within a handful of years of each other between 1909 and 1916, primarily to provide consistent, comparable assessment of the credit risk attached to railway bonds which funded the rapid development of the US railroad industry at the turn of the century. Prior to that, investors relied on relationships, bank analysis and their own internal credit assessment.

What a rating actually is

A credit rating is an opinion, about the probability of default of an issuer over a time period (long or short term), or in other words, their willingness and ability to meet their future obligations in full and on time. They are based on analysis of published accounts, management discussions, other company data and sector analysis. The agencies run and publish their own long-run default studies which show the expected default rates by rating band. What a rating is not: a market price, a liquidity forecast, or a rapidly adjusting indicator of credit quality. Ratings decisions are prepared by analysts, confirmed by committees and often subject to commercial sensitivity and other conflicts. They don't move quickly.

The scales

All three agencies rank issuer credit quality, and they do it on two different horizons.

Long-term issuer rating assesses the issuer's capacity to meet their financial obligations over a longer time-frame.

All 3 agencies rank issuers on a 20-point scale from AAA/Aaa to D/default. The higher the rating, the higher the credit quality, lower likelihood of default, and usually a lower yield (all things equal) paid by the issuer. The first 10 notches on the scale from AAA/Aaa to BBB-/Baa3 are considered "Investment grade". High-quality credits with the lowest levels of default risk. Below that, from BB+/Ba1 to C/D carry significantly higher risk, are often called sub-investment grade, speculative, high-yield debt or junk bonds. They pay significantly higher yield to compensate for the elevated default risk. As a result, the line between BBB-/Baa3 and BB+/Ba1 is the most significant gap, representing a line that many investors won't cross below.

Many treasury policies set this as a floor, but a more cautious approach may also set a higher target credit rating in addition to the rating floor to avoid a forced liquidation if a BBB- investment experiences a downgrade.

Short-term issuer rating: Same concept, but for shorter time horizons and more liquid instruments and exposures such as commercial paper, certificates of deposit, money market funds and margin collateral. There is also slightly more divergence in the ratings scales, but they map to the same broad interpretations.

* P - Prime, NP - Not-Prime, D - Default, SD - Selective Default, RD - Restricted Default

Compensation model

Ratings agencies make their money in two ways.

• Issuer pays model, where issuers of debt have to pay for a rating before they issue debt, and ongoing monitoring afterwards.
• Subscriber model (investor pays), major rating agencies also charge subscribers to access their research separately. Some smaller agencies operate completely on a subscriber funded model, offering a more independent output.

Of the two, Issuer pays is the source of the majority of major ratings agencies revenue (although both Moody's and S&P have grown their quantitative analysis and market intelligence arms significantly). This creates an obvious conflict and has also created some famous arguments which we cover below.

Shortcomings & limitations

The ratings system serves a central role in the issuance of debt, and functioning markets. They reduce or remove the need for individual investors to gather data and perform their own analysis and facilitate the benchmarking of issuances with similar risk. But they also have their shortcomings and have attracted significant controversy and criticism in the past.

Political pressure

It is little wonder that ratings agencies can be slow to announce negative actions when you see the backlash that occurs from their customers. Apart from the loss of a customer and intense criticism from corporate customers, governments and government agencies are even worse.

Knowing what is being rated

We have already mentioned in a few articles, but it is worth repeating:

Banking groups are complex structures, with many entities, types of issuance for different purposes, with different credit quality and credit support.

If you are investing in non-standard instruments, or a non-core subsidiary, it is important to understand where they sit in a resolution.

Most large banks publish a full list of their eligible ratings on their website. As the example below shows, the range can be very wide, spanning in this case from AAA down to Baa3.

For simple deposit exposure, both Moody's and Fitch publish a Long-term bank deposit rating separate to long term issuer ratings. It applies to the most junior class of uninsured deposits, which is exactly the risk corporate deposits assume once you pass deposit guarantee thresholds. S&P doesn't have a separate deposit rating, so the operating entity long-term Issuer Credit Rating is the best proxy.

FX forwards, derivatives and margin collateral exposure is more nuanced. Where available, Moody's Counterparty Risk Rating, Fitch's Derivative Counterparty Rating are designed for derivative exposures. S&P's Resolution Counterparty Rating applies to collateralized trades only. The Issuer Credit Rating more appropriate for uncollateralized lines.

If you can't find the one that's relevant for you, ask your relationship manager. Letters of comfort or soothing comments from a relationship manager will not stand up when an administrator is called in.

Rabobank credit ratings as of 14/08/2026. * Ratings also apply to MREL eligible senior preferred bonds.

Ratings are not a seatbelt

Credit Suisse carried investment-grade ratings until its final week; SVB carried them into the run. These examples highlight exactly why credit ratings shouldn't be used as an action trigger or early warning indicator. Ratings changes are determined by committee process anchored to published financials and will trail a deposit run conducted by smartphone every time. So ratings set the floor of a counterparty framework: the minimum grade for holding money at all. The ceiling, when your appetite changes, when you decide to move, needs faster inputs: CDS spreads, equity moves, and other more timely signals. We cover these in the next article.

Lessons for corporate treasurers

Set your risk appetite (the minimum credit quality you are willing to be exposed to), give yourself a buffer (aim for higher rated if possible), monitor outlook and watch changes instead of waiting for the rating announcement.