# Credit Ratings > Credit ratings from S&P, Moody's and Fitch grade the risk of default on bonds. Learn the scales, investment grade vs high yield, default rates by rating and limits. Source: https://learn.tradelabsai.com/bonds-credit/credit-ratings/ Track: Bonds, Rates and Credit · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Credit Ratings", https://learn.tradelabsai.com/bonds-credit/credit-ratings/ A credit rating is an opinion from a rating agency about how likely a borrower is to repay its debts on time. The three largest agencies, S&P Global Ratings, Moody's and Fitch Ratings, rate governments, companies, municipalities and structured products. Ratings influence borrowing costs, determine which bonds many institutions can hold and move markets when they change. They are useful summaries, but they are opinions, not guarantees, and they have been badly wrong at times. ## Rating scales | Category | S&P and Fitch | Moody's | Meaning | |---|---|---|---| | Highest quality | AAA | Aaa | Extremely strong capacity to pay | | High quality | AA+, AA, AA minus | Aa1, Aa2, Aa3 | Very strong | | Upper medium | A+, A, A minus | A1, A2, A3 | Strong, somewhat sensitive to conditions | | Lower medium | BBB+, BBB, BBB minus | Baa1, Baa2, Baa3 | Adequate; lowest investment grade | | Speculative | BB+, BB, BB minus | Ba1, Ba2, Ba3 | Significant uncertainty | | Highly speculative | B+, B, B minus | B1, B2, B3 | High risk | | Substantial risk | CCC+ to CC | Caa1 to Ca | Very high risk; default possible | | Default | D (S&P), D/RD (Fitch) | C | In default | BBB minus (Baa3) and above is investment grade; BB plus (Ba1) and below is high yield. See [Investment Grade vs High-Yield Bonds](https://learn.tradelabsai.com/bonds-credit/high-yield-bonds/). ## Default rates by rating Historical data from the agencies shows a strong link between ratings and defaults. | Rating | Approximate average 5 year cumulative default rate | |---|---| | AAA | Under 0.5% | | AA | Under 0.5% | | A | About 0.5% to 1% | | BBB | About 1.5% to 2% | | BB | About 6% to 8% | | B | About 15% to 20% | | CCC and below | 40% or more | Approximate long run averages from S&P and Moody's default studies for corporate issuers; actual rates vary by period and source. See [Default Probability and Recovery Rate](https://learn.tradelabsai.com/bonds-credit/default-probability/). ## What agencies analyse - **Business risk:** industry, competitive position, scale. - **Financial risk:** leverage, interest coverage, cash flow, liquidity. See [Operating and Financial Leverage](https://learn.tradelabsai.com/fundamentals/operating-and-financial-leverage/). - **Management and governance.** - **Country and sovereign risk.** - **Structure:** seniority, collateral and covenants of the specific bond. ## Outlooks and watches Agencies signal possible changes: - **Outlook (positive, negative, stable):** direction of a rating over the next one to two years. - **CreditWatch or review:** a change may come soon, often after a major event. ## Why ratings matter | Effect | Explanation | |---|---| | Borrowing costs | Lower ratings mean higher yields. See [Credit Spreads](https://learn.tradelabsai.com/bonds-credit/credit-spreads/) | | Investment rules | Many funds, insurers and banks are limited to investment grade | | Index membership | Bond indices separate investment grade and high yield | | Capital requirements | Bank and insurer capital rules have used ratings | | Collateral and triggers | Downgrades can trigger collateral calls in derivatives contracts | **Example: A fallen angel** A BBB minus rated company with $10 billion of bonds is downgraded to BB plus. Investment grade funds and indices must sell, while high yield buyers need to absorb a large new supply. The bonds' spread widens from 220 to 340 basis points within weeks, a price drop of roughly 7% for bonds with a duration of 6, even before any change in the company's actual default risk. Ford, downgraded to high yield in 2020, was one of the largest fallen angels on record. See [Corporate Bonds](https://learn.tradelabsai.com/bonds-credit/corporate-bonds/). ## Criticisms and failures - **The 2008 crisis:** agencies gave AAA ratings to many mortgage backed securities and collateralised debt obligations that later suffered huge losses. The US Financial Crisis Inquiry Commission called the agencies "key enablers" of the crisis. See [The 2008 Financial Crisis](https://learn.tradelabsai.com/history/the-2008-financial-crisis/). - **Conflicts of interest:** under the "issuer pays" model, borrowers pay for their own ratings. - **Slow to react:** ratings often change after market prices have already moved; Enron was rated investment grade until days before its 2001 bankruptcy. - **Sovereign controversies:** downgrades of the US (S&P 2011, Fitch 2023, Moody's 2025) and European countries during the debt crisis drew criticism. ## Using ratings wisely - **Treat ratings as a starting point,** not a final answer. - **Watch market spreads,** which react faster than ratings. - **Understand what is rated:** the issuer, a specific bond or a structured tranche. ## Frequently asked questions ### What is a credit rating? An opinion from a rating agency on a borrower's ability to repay its debt on time, expressed on a letter scale from AAA to D. ### What is the difference between investment grade and high yield? Investment grade bonds are rated BBB minus (Baa3) or higher; high yield bonds are rated BB plus (Ba1) or lower and carry higher default risk. ### Are credit ratings reliable? They are correlated with default rates over long periods, but they can be slow to change and failed badly for structured products before 2008. Next, learn how bond returns are measured in [Yield to Maturity](https://learn.tradelabsai.com/bonds-credit/yield-to-maturity/). ## Continue learning - Next lesson: [Yield to Maturity](https://learn.tradelabsai.com/bonds-credit/yield-to-maturity/) - Previous lesson: [Investment Grade vs High-Yield Bonds](https://learn.tradelabsai.com/bonds-credit/high-yield-bonds/) - Related: [Investment Grade vs High-Yield Bonds](https://learn.tradelabsai.com/bonds-credit/high-yield-bonds/): High yield bonds are rated below investment grade and pay higher interest for higher default risk. Learn how they behave, default cycles, spreads and how to invest. - Related: [Corporate Bonds](https://learn.tradelabsai.com/bonds-credit/corporate-bonds/): Corporate bonds are loans to companies that pay interest above government bonds. Learn investment grade vs high yield, spreads, covenants, callable bonds and risks. - Related: [Default Probability and Recovery Rate](https://learn.tradelabsai.com/bonds-credit/default-probability/): Default probability is the chance a borrower fails to pay. Learn historical default rates, probabilities implied by spreads, the Merton model and recovery rates. - Related: [Credit Spreads](https://learn.tradelabsai.com/bonds-credit/credit-spreads/): A credit spread is the extra yield a risky bond pays over a safe benchmark. Learn how spreads are measured, what drives them and what they signal about risk. - Related: [The 2008 Financial Crisis](https://learn.tradelabsai.com/history/the-2008-financial-crisis/): The 2008 financial crisis grew from a US housing bubble into a global banking panic. Learn the causes, the collapse of Lehman Brothers, the response and the lessons.