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Credit Trends: The Cost of a Notch

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Credit Trends: The Cost of a Notch

S&P Global Ratings' credit ratings correlate negatively with the cost of debt, meaning cost usually
rises as ratings decline. Our corporate credit ratings are therefore useful benchmarks in
determining the margins over risk-free Treasuries that debt issuers pay to access the capital
markets. This relationship holds up well historically.
We have made the following key observations:
- Over the past 10 years, spreads on 'BBB-' rated debt have averaged 284 basis points (bps),
lower than 360 bps for 'BB+' rated debt, and the standard deviation over the same period
jumps to 117 bps from 90 bps.
- The tightest spreads since 2003 were prior to the financial crisis of 2008, with
investment-grade (rated 'BBB-' or higher) spreads reaching a minimum of 86 bps in early 2005
and speculative-grade (rated 'BB+' or lower) spreads as low as 246 bps in the middle of 2007.
Spreads widened dramatically during the crisis, with investment-grade debt rising to 566 bps
and speculative-grade debt reaching 1,730 bps in December 2008.
- Spreads on debt with negative outlooks are wider than those on debt with stable outlooks at
the same rating levels, with 'A-' and 'BBB+' rated debt with stable outlooks averaging 169 bps
and 195 bps, respectively, over the past 10 years, lower than 212 bps and 233 bps for debt at
the same ratings with negative outlooks.