How do you find out a company’s credit rating? First, understand what these three different types of ratings mean. Then, learn how to use them to make informed investment decisions. This article was written by Koresh Galil. We’ll cover all three categories and what each one means for your business. Also, learn more about the investment grade classification. Here’s how to make an investment decision based on a credit rating.
Investment grade
What is an investment grade? In finance, it’s a term used to describe a debt instrument such as a fixed income bond, bill, or note. Investment grade bonds generally have fixed rates of interest and are relatively safe to invest in. The rating of a company is based on the financial ratios of the company issuing the debt, including its leverage ratio, its profitability, and its cash flow to debt ratio.
The yield on investment grade corporate bonds is made up of two components: a government bond component and the spread. The government bond component is a bit higher at about 2.1%. The spread, or additional yield, compensates for the risk of investing in a company. In other words, you pay more to invest in a bond issued by a company that is riskier than a government. The higher the spread, the more risk the company is.
Currently, there are hundreds of U.S. corporations with investment grade ratings. Hundreds of midsized companies also have this credit rating. Historically, only a small number of companies have a corporate credit rating above investment grade. But Delta’s recent upgrade by Moody’s is symbolic of a long-term trend of rising interest rates. The upgrade also highlights the strength of Delta’s balance sheet. For example, Delta Air Lines has a $4.4 billion debt liability, while United Continental has a mediocre AA credit rating.
Dubai Aerospace Enterprise (DAE) Ltd. recently received an investment grade corporate credit rating. The Kroll Bond Rating Agency assigned a BBB+ to the Dubai-based aerospace corporation. DAE is one of the largest aircraft leasing companies in the world, with seven locations. The rating of this Middle Eastern company reflects its strong financial position. These ratings indicate that the company is able to meet its obligations to investors. Therefore, the rating can be a good indication of its future performance.
In addition to DUB’s DUB, Ahold also recently received an upgrade by Fitch Ratings. While the company’s corporate credit rating is still one notch below investment grade, Fitch’s outlook for Ahold’s finances is optimistic. However, the company needs to sell some of its non-core businesses in order to improve its ratings. And the Dutch government has a long way to go. The government needs to support a corporate credit rating that reflects the company’s financial stability.