Moody's ratings are a system of evaluating the creditworthiness of a business, government, or financial instrument. They are issued by Moody's Investors Service, a bond credit rating agency.
The ratings are a measure of the risk associated with a particular investment. They range from Aaa, which signifies the highest quality with the smallest degree of risk, to C, which indicates that the investment is typically in default with little prospect for recovery of principal or interest.
The ratings are divided into Investment grade and Non-investment grade category.
1. Investment Grade
These are considered low risk. They include:
Aaa: Prime (Extremely low credit risk). Bonds rated Aaa are considered to be of the highest quality and have the lowest risk of default.
Aa1, Aa2, Aa3: High grade (Very low credit risk). Bonds rated Aa are considered to be of high quality and have a low risk of default.
A1, A2, A3: Upper medium grade (Low credit risk). Bonds rated A are considered to be upper medium grade and have a moderate risk of default.
Baa1, Baa2, Baa3: Lower medium grade (Moderate credit risk). Bonds rated Baa are considered to be of medium grade and have a somewhat higher risk of default.
2. Non-Investment Grade
These are also known as speculative grades and are considered high risk. They include:
Ba1, Ba2, Ba3: Non-Investment grade speculative (Substantial credit risk). Bonds rated Ba are considered to be speculative and have a high risk of default.
B1, B2, B3: Highly speculative (High credit risk). Bonds rated B are considered to be highly speculative and have a very high risk of default.
Caa1, Caa2, Caa3: Risks are extremely high (Very high credit risk). Bonds rated Caa are considered to be of poor standing and have a very high risk of default.
Ca: In or very near default, but with some prospect of recovery of principal and interest. Bonds rated Ca are highly speculative and are likely in, or very near, default.
C: Typically in default, with little prospect for recovery of principal or interest. Bonds rated C are in default and have little prospect of recovery.
The ratings are based on a variety of factors, including the issuer's financial condition, industry position, and economic and debt characteristics. They are used by investors to gauge the likelihood that they will receive the returns they are promised on their investments.
It's very important to remember that while these ratings are a useful tool for measuring credit risk, they are not a guarantee. Investors should still conduct their own thorough research before making any investment decisions.
Moody's Short Term Rating
Moody's also assigns short-term ratings to debt securities with a maturity of one year or less. Short-term ratings are based on the issuer's ability to repay its debt obligations within the next year.
P-1: Bonds rated P-1 are considered to be of the highest quality and have the lowest risk of default.
P-2: Bonds rated P-2 are considered to be of high quality and have a low risk of default.
P-3: Bonds rated P-3 are considered to be of medium grade and have a moderate risk of default.
Not Prime: Bonds rated Not Prime are considered to be speculative and have a high risk of default.
Once more, we would like to reiterate that Moody's ratings are not guarantees of future performance. The creditworthiness of an issuer can change over time, and Moody's may change its ratings accordingly. Investors should always do their own research before investing in any debt security.