Two well-known rating services—Moody’s Investors Service and Standard & Poor’s Corporation—provide ratings as a guide to investors on the relative security and value of an issue. Since these rating services work on a fee basis, many bonds are non-rated. The investor should use extreme caution in the purchase of non-rated bonds. Here is how the two services rate bonds:
In the purest sense, the credit analysis of a general obligation bond centers on two issues: (1) the municipality’s ability to pay and (2) its ability to pay its debts in a timely manner. The two main rating companies for municipal bonds are Moody’s and S&P. The basic difference between the ways that the two rating companies analyze bonds is that, while Moody’s concentrates on debt burdens and debt ratios, S&P focuses on the socioeconomic base of a community (e.g. per capita growth trends, total personal income). The Moody's ratings in the following ratings explanations are in parenthesis:
AAA (Aaa) - The highest rating assigned by Moody’s and S&P. Capacity to pay interest and repay principal is extremely strong.
AA (Aa) - Debt has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in a small degree.
A - Debt rated “A” has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse affects of changes in circumstances and economic conditions than debt in higher-rated categories.
BBB (Baa) - Debt is regarded as having an adequate capacity to pay interest and repay principal. These ratings by Moody’s and S&P are the “cut-off” for a bond to be considered investment grade. Whereas debt normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal in this category than in higher-rated categories.
BB (Bb), B, CCC (Ccc), CC (Cc), C
BB (Bb), B, CCC (Ccc), CC (Cc), C - Debt rated in these categories is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. “BB” indicates the least degree of speculation and “C” the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or market exposure to adverse conditions and are not considered to be investment grade.
D - Debt rated “D” is in payment default. This rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period.
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* Those bonds in the A to Baa groups which Moody’s believes possess the strongest investment attributes are designated by the symbols A-1 and Baa-1 within categories.
** The ratings from “AA” to “B” may be modified by the addition of a plus or minus sign to show relative standing within major categories.