A guide to credit ratings definitions

GICP expert view / 15 July, 2024

A credit rating is an evaluation of the credit risk associated with a borrower or a financial instrument. It reflects a borrower's ability to repay debt and is based on the analysis of various factors, including financial health, market conditions, and economic outlook depending on the specific rating criteria.

The “Ratings Definitions” report published by Fitch Ratings, offers a deep dive into ratings, with key terms and definitions from across the range of credit ratings:

Actions and reviews: Ratings are reviewed periodically and as new information arises or circumstances change. Actions include affirmations, upgrades and downgrades.
Outlooks and watches: Outlooks indicate the direction a rating is likely to move over a one-to two-year period. A watch indicates that there is a heightened probability of a rating change and the likely direction of such a change.
International credit rating scales: These scales feature the symbols ‘AAA’ (highest credit quality) to ‘D’ (default) and ‘F1’ (highest short-term credit quality) –‘D’ (default). They apply to issuers and obligations across sectors. Credit ratings assigned on these scales assess the capacity to meet financial commitments in local and/or foreign currencies and as such are internationally comparable.
Corporate finance obligations: Ratings of individual securities or financial obligations of a financial or non-financial corporate issuer address relative vulnerability to default and recovery given default. They range from 'AAA' to 'C'.
Sovereigns, public finance and global infrastructure obligations: These ratings consider the relative vulnerability to default and range from 'AAA' to 'D'.
Structured finance: Ratings in this sector assess the relative vulnerability to default of structured finance obligations, typically assigned to individual securities or tranches, and range from 'AAA' to 'D'.
Financial institution ratings: Government and shareholder support ratings assess the likelihood of extraordinary support to prevent a bank or non-bank financial institution (NBFI) defaulting on its obligations. Viability ratings measure the intrinsic creditworthiness and likelihood of failure of a bank or NBFI. These range from ‘aaa’ to ‘f’.
Insurer financial strength ratings: These ratings reflect both the ability of an insurer to meet obligations on a timely basis and expected recoveries received by claimants in the event the insurer stops making payments or payments are interrupted, due to either the failure of the insurer or some form of regulatory intervention. They range from ‘AAA’ to ‘C’ and ‘F1’ to ‘C’.
National credit rating scales: These scales express creditworthiness within a specific country using similar symbols to international ratings but with a country-specific suffix.
International non-credit rating scales: Ratings such as international money market fund ratings and fund credit quality ratings, focus on different aspects of financial instruments and entities. They are not meant for assessing credit risk but instead offer insights into other characteristics.
National non-credit rating scales: Similar to international non-credit ratings but specific to a country, these assess relative credit quality within that country.
Recovery ratings: The recovery rating scale is based on the expected relative recovery characteristics of an obligation upon the curing of a default, emergence from insolvency or following the liquidation or termination of the obligor or its associated collateral. It ranges from 'RR1' (91-100% recovery) to 'RR6' (0-10% recovery).

The report also highlights important limitations of credit ratings and other opinions. Knowing the scope and limitations of credit ratings allows investors and stakeholders to use them accurately in conjunction with other analyses and data sources, leading to more informed and balanced decision-making.

To view the full report visit the Fitch Ratings’ website.