Corporate And Municipal Bond Ratings By The Numbers

American Corporate and Municipal Bond Ratings

On April 11, 2014, there were only three companies with AAA credit ratings in the U.S. according to S&P. Those companies were Johnson & Johnson, Exxon-Mobil, and Microsoft.

The number of companies with the top-credit rating has been dwindling for years. Back in 1980, there were more than 60 U.S. companies rated AAA by S&P. That fell to six in 2008. Since then,” General Electric, Pfizer and ADP were downgraded.

I wouldn’t be surprised if there were four or five AAA rated companies today, but I don’t have the exact figure.

Just 800 companies (less than 5%) have investment grade bonds out of 23,000 U.S. companies with revenues over $35 million whose credit was reviewed by bond rating agencies. But, only about 1,800 companies with non-investment grade bonds, however, have actually issued publicly traded bonds. So, about 30% of publicly traded bonds are investment grade, and only about 0.1%-0.2% of publicly traded bonds are AAA rated. Companies with sales of less than $35 million per year are not eligible for an investment grade bond rating.

An investment grade bond rating, in practice, roughly corresponds to classification of a “large capitalization” stock, although in principle, bond ratings are not directly dependent upon market capitalization.

The rating system at Standard and Poors and at Fitch ranks investment grade bonds as follows (Moody’s equivalent rating):

AAA (Aaa)
AA+ (Aa1)
AA (Aa2)
AA- (Aa3)
A+ (A1)
A (A2)
A- (A3)
BBB+ (Baa1)
BBB (Baa2)
BBB- (Baa3)

Moody’s rating are somewhat more strict than comparable ratings by Standard and Poors (S&P) as illustrated by historic default rates for bonds of a given rating.

Historical default rates vary greatly, but in the S&P system through 2007, averaged about 0.6% for AAA, 1.5% for AA, 2.9% for A, 10.3% for BBB, 29.9% for BB, 53.7% for B, and 69.2% for any kind of C rating.  This is measured over the life of the long term bond and is not an annual default rate.

Historical default rates on municipal bonds are much lower than default rates on corporate bonds with the same rating until 2010 when Moody’s and Fitch abolished the separate system (S&P abolished the separate system in 2001).  More recent municipal bond issues are rated on the same scale as corporate bonds.  For example, in the old system, S&P BB rated municipal bonds have about the same default rate on average as S&P AA rated corporate bonds.  Investment grade municipal bonds as rated by any major bond rating agencies under the old system have default rates lower than AAA rated corporate bonds.

Chinese Corporate Bond Ratings

In contrast, in China:

Around 97% of existing yuan-denominated bonds hold ratings of double-A to triple-A—the best a company can get.

That is from Fiona Law at the Wall Street Journal, cited by Christopher Balding, and ultimately Alex Frangos via Marginal Revolution.

Meanwhile, a Chinese government agency, the China Securities Finance Corp (CSF), central bank-backed refinancing institution, is now “among top 10 shareholders of many listed-firms” as Chinese regulators have stepped in to prop up a collapsing stock market. Effectively, this is turning what had until recently been a mostly theoretical communist basis of the Chinese economy into one in which state ownership of enterprise is again rapidly becoming the norm.

from Wash Park Prophet
via Denver News

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