There are three major credit ratings agencies that assign a grade to a corporation’s long-term debt obligations. These include Standard and Poor’s (S&P’s), Moody’s Analytics, and Fitch. These ratings provide investors with insight into the ability of an organization to pay off its liabilities and financial obligations. The ratings agencies will typically only issue and update ratings for national publicly-traded companies.
Credit ratings range from “AAA” to “C”. A company with a rating of “AAA” shows strong financial ability to cover their obligations. There are only a small number of companies that are given this rating. Any rating that is above “BBB-“ (S&P) or “Baa3” (Moody’s) is considered “investment grade”. These are generally strong financial companies that have, at a minimum, the capacity to cover their obligations. Any rating that is below these levels is considered to be at a higher risk of defaulting on their debt. These ratings are considered “speculative” or “junk”.
Investors should seek out investment property leased to tenants with investment-grade credit to increase the long-term security of their capital and reliability of their cash flow. However credit ratings should not be the only indicator of financial strength an investor looks at. Investors should look at financial statements and other documents to gain a comprehensive understanding of a company’s financial health.