Negative Watch
At the point when one of the three major credit-rating agencies places a company on negative watch, it shows that the agency has noticed a situation or conditions that could make it downgrade the company's credit rating soon.
It's anything but a slam dunk. When a rating agency places a company on negative watch, there is a half chance that the company's rating will be brought down at some point in the next 90 days.
Grasping Negative Watch
Notwithstanding its credit rating, the agencies connect an outlook to a company, mirroring the agency's decision about the ability of that company to repay its debt. The outlook might be stable, under survey, negative watch, or negative. No company or nation at any point needs to be placed on a negative watch. They would prefer to be stable, or, even better, to be placed on positive watch, which is the path to a credit rating upgrade.
Having its credit rating downgraded, or being under a negative watch, is a big blow for a company. It means it should pay a higher rate of interest to borrow money from a bank or issue bonds on the market for the foreseeable future.
Besides, it is a signal that the company is probably going to underperform compared to its friends. Stock investors will peruse it as a harbinger of terrible news about a company. The news could negatively impact the company's reputation with all partners incorporating with the overall population.
The Rating Agencies' Role
The three credit ratings are Standard and Poor's (S&P), Moody's Investors Service, and Fitch Ratings. Their job is to assess the creditworthiness of companies, and the ratings they assign straightforwardly determine the interest rates a company must pay its bondholders.
A negative watch is the consequence of an analysis of a company's current financial condition.
While a rating agency downgrades a company's credit rating, it is a signal that the company will probably underperform compared to its friends.
A downgraded credit rating implies that a company isn't currently solvent enough to repay its debts promptly. It might not have enough free cash flow to meet its long-term obligations, or there may be a bigger issue in question with respect to its ability to secure new customers or hold old customers.
Ratings agencies might downgrade whole nations, or place them on negative watch.
Negative Watch and the Default Premium
Companies and countries placed on negative watch could eventually pay a default premium to access capital for growth. A default premium is an extra amount a borrower must pay in interest to repay a lender for expecting the greater default risk.
Investors frequently measure the default premium as the yield on a bond issue well beyond a government bond yield of comparative coupon and maturity. For instance, in the event that a company issues a 10-year bond, an investor can compare this to a U.S. Treasury bond of a 10-year maturity.
Even after a 2011 downgrade due to the financial crisis, S&P rates U.S. bonds at AA+. That is all there is to it's second-highest rating. Due to the high degree of safety of U.S. debt and its stable outlook, the Treasury can offer bonds at a somewhat humble rate of interest. The rates for all corporate bonds must be set higher to draw in investors.
The ratings that are placed on bonds at the time they are issued determine how much higher that premium will be. The outlook shows to potential purchasers whether its rating is probably going to stay at its current level for the foreseeable future.
Highlights
- A company's rating is an indication of its ability to repay its debt.
- A negative watch demonstrates that its ability to repay might deteriorate.
- A company's outlook might be stable, under survey, negative watch, or negative.
