The Retirement Corporation of America

The Rating Game

WHEN IT COMES to buying bonds, quality matters. You want to know the issuer has the wherewithal to keep paying you interest on time for as long as you own your bond—5, 10, 20 or even 30 years from now.

Bond-rating companies assign quality ratings to every new bond when it comes out based on the issuer's financial health and creditworthiness. The rating companies continue to monitor a bond issuer's soundness for the life of its bonds, downgrading them or upgrading them if the issuer's financial position changes.

A bond's rating tells you how creditworthy the issuer is. In other words, the rating tells you how likely you are to get your money back plus the interest promised. Several firms, including Moody's, Standard & Poor's, Duff & Phelps and Fitch, rate bonds by looking at the issuer's financial soundness and its track record of paying off its other debt in the past. The two largest of these companies are Moody's and S&P.

To confuse matters, each company uses slightly different letters or combinations of letters to designate the quality of a bond. The table on page 25 shows you the ratings each company uses and what they mean.

If you're thinking about buying a bond, don't just find out what rating it carries. Call the rating company and ask for a copy of its complete report on the issuer. The report will tell you exactly what kinds of risks the rating company believes the issuer has. The company may already have a fairly large existing debt load compared with its equity. It might be a company that's growing rapidly and seems likely it will want to tap the bond market for additional capital again soon. Or, the company might be in an industry where there have been a lot of takeovers lately, which can hurt bondholders.

Keeping Up With Change

How do you know if your bond's rating changes? Rating companies usually signal the investment community when they are considering a rating change. Moody's announces that a security is "under review", for example. S&P uses its CreditWatch list, Fitch uses its Rating Alert and Duff & Phelps its Rating Watch.

Many public libraries carry these reports. If a rating company is thinking of making a change involving a big company, the press often picks up the news. When the rating of a major company or a city or state is cut, it usually is reported in the financial press.

You can get the current rating on most bonds by calling the ratings information desk at Moody's or S&P's credit division. Both companies are in New York City.

Credit Ratings

These are the different ratings each of the four major bond-rating firms use: