How to Read a Credit Rating
The As, Bs, Cs and occasional Ds the big credit-rating agencies assign to corporate debt provide insight into a company's financial health that you won't find elsewhere. Unlike stock analysts, who focus on earnings, credit-rating analysts look at whether a company can come up with enough dough to cover its debts.
Exactly what do the ratings tell you? First, they give you a sense of how likely a company is to miss interest payments to lenders or otherwise fall short on financial obligations. Standard & Poor's (which like BusinessWeek is a unit of The McGraw-Hill Cos.) figures that over the past 15 years, fewer than 1% of the companies that carry its top rating have turned into deadbeats, but that 35% of companies rated B have defaulted. The credit analysts also assess business strategy and industry outlook. So a company with little debt won't merit AAA if its business prospects are mediocre, says Laura Feinland Katz, a managing director at S&P.
Because S&P, Moody's Investors Service, and Fitch Ratings each apply a fairly standard analysis to companies of all stripes, credit ratings can also help you compare players in different industries. And tracking a company's ratings history can help you spot trouble in an industry. For example, Kevin Cronin, chief investment officer for fixed-income at Putnam Investments, believes S&P's downgrade of J.P. Morgan Chase's (JPM ) credit ratings on Sept. 17 means other banks may also face downgrades.
That said, credit ratings have limitations. Unlike stock reports, they don't recommend when to buy or sell a company's stock or bonds. What's more, don't count on them to provide an early warning that a company will go belly-up. The credit agencies downgraded Enron and WorldCom as problems surfaced, but they still maintained investment-grade ratings until shortly before they filed for bankruptcy. Bonds rated BB and lower by S&P, and Ba1 and below by Moody's, are noninvestment grade and carry a greater default risk. "Credit ratings tend to be lagging indicators," says Stephen Kane, a bond-fund manager at Metropolitan West Asset Management.
You can find a company's ratings on standardandpoors.com, moodys.com, and fitchratings.com. At the Moody's site, type in the ticker symbol for a handy list of a company's ratings history. At Fitch's, the ticker symbol will get you a current rating. At S&P's newly revamped site, you must search via industry to find a specific company. If it recently had a ratings change, you can get access to S&P's releases that explain why it took the action. You can also find detailed credit reports for some high-profile companies, although such reports are generally available only to institutional subscribers. If you don't find what you're seeking, you may be able to obtain specific credit reports from your stockbroker.
By Susan Scherreik