Credit Ratings Transitions

When looking at corporate bonds, credit ratings play an important role in the decision making process of investors.

Something that investors should also take into consideration is the ratings transition matrix that the credit rating agencies publish (most have to disclose this as part of a regulatory requirement).

Below is the transition matrix from one rating agency based on a study of thousands of bonds by that rating agency.

99% of companies rated AAA or AA stay at that rating +/- 1 notch.

93% of AA rated companies maintain their rating, 1.40% of them get upgraded, and 5% of them get downgraded. That captures 99.4% of AA rated companies.

For high quality issuers, the right set of covenants will actually help keep the issuer within their rating category and provide better value to investors than security.

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