What Is A-/A3?
A-/A3 are a pair of rating categories issued by two different rating agencies, Moody's and S&P, to reflect long-term investment grade bond creditworthiness. Both A-and A3 address medium-level investment grade credit ratings for a debt issuer or a debt instrument.
The credit ratings assigned by the various rating agencies are based primarily upon the safety net provider's or alternately issuer's creditworthiness; one might say, they are a quantified assessment of the creditworthiness of a borrower. A-and A3, similar to all ratings, can be deciphered as a direct measure of the probability of default. In any case, credit stability and priority of payment are also factored into the rating.
A-/A3 ratings are issued to long-term bond issuers by Moody's and S&P, individually. The rating of the issuer designates the creditworthiness of the issuer. A-/A3 is the seventh-highest rating a debt issuer can receive. Four rankings above the cutoff separates investment grade debt from high-yield, or non-investment grade debt.
|Investment grade ratings|
Example of A-/A3 Rating
XYZ Corp is hoping to raise capital by giving long-term debt. It creates a consumer product that used to be popular yet has lost market share as of late, and the company's revenues have been contracting.
XYZ is encountering decreased free cash flow and its balance sheet fundamentals are weakening. Be that as it may, the company actually has a great record of servicing its debt. Thus, Moody's and S&P rank XYZ's debt A-/A3.
Special Considerations: Credit Downgrades
Investors ought to know 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 just a one-step drop in credit rating, the repercussions can be serious.
The drop to junk status telegraphs that a company may battle to pay its debts. The downgraded status can make it even more hard for companies to source financing options, causing a downward spiral as costs of capital increase.
- A-/A3 are medium investment grade credit ratings offered by Moody's and Standard and Poor's.
- The two ratings mean that the issuer has financial backing and some cash reserves with a low risk of default.
- A-/A3 is the seventh-highest rating a debt issuer can receive and is four rankings above the cutoff for junk bonds.