Bond Ratings: A cheat sheet to Bond Rating Agency report cards

municipal bond rating cheat sheet

Bond Agency Report Cards

There are three main agencies which rate bonds. These ratings apply to corporate and municipal bonds. A downgrade or an upgrade from one of these agencies usually results in a stampede for the door (entrance or exit). Unfortunately, most of the doors right now are only exit doors.

The most damaging downgrade is when a bond gets downgraded from ‘investment grade’ to
‘non investment grade’. This is the area below BBB. Besides just the stigma attached to becoming a non investment grade bond, this is considered a material and significant event for insurance companies, pension plans and mutual funds whose charter specifies that they can only invest in ‘investment grade’ bonds. For these companies, when a bond gets rated lower into the ‘non-investment grade’ abyss, they must sell the bond. So, you will see extreme selling of bonds when this type of downgrade occurs.

You can see from the chart that each agency has it’s own proprietary Report Card using letters. One would think that a similar grading scale across the board (all agencies) would make this easier for the average investor. Whatever!–this chart sure comes in handy.

Even if you don’t plan on buying bonds, bond ratings are often predictors of what direction the equity market (stocks) will take. Rating agencies evaluate the health of the city or state(municipal bonds), or company (corporate bonds). For the most part, equity investors of company stocks rely on quarterly reports to evaluate a company’s balance sheet. Bond ratings come out at various times inbetween quarterly reports, giving investors a preview of the health of a company.

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