Understanding Credit Ratings
What is a Credit Rating?
A Credit Rating is an Informed Opinion
Credit ratings are forward-looking opinions about an issuer’s relative creditworthiness. They provide a common and transparent global language for investors to form a view on and compare the relative likelihood of whether an issuer may repay its debts on time and in full. Credit ratings are just one of many inputs that investors and other market participants can consider as part of their decision-making processes.
The mission of S&P Global Ratings is to provide high-quality, objective, independent, and rigorous analytical information to the marketplace. The quality, integrity, and transparency of our ratings are at the heart of what we do.
Our credit ratings are designed to provide relative rankings of creditworthiness. They are assigned based on transparent methodologies available free of charge on our website. These methodologies are calibrated using stress scenarios (see Understanding Ratings Definitions and Ratings Definitions) and Credit Stability Criteria are designed to promote rating comparability across different sectors and over time. They are subject to a rigorous independent validation process.
Key Takeaways
Credit ratings are independent opinions about the creditworthiness of an entity or a debt obligation. They evaluate the ability and willingness of borrowers to meet their financial commitments in full and on time, and serve as important benchmarks in financial markets, helping investors assess risk, compare investment opportunities, and make informed decisions.
Credit rating agencies (CRAs) are specialized financial institutions that evaluate the creditworthiness of debt issuers by analyzing their financial health, business sustainability, industry dynamics, management quality, debt structure, and economic context. They provide standardized, forward-looking opinions on relative credit risk, continuously monitor rated entities, and update ratings when material changes occur.
Credit ratings are one of several inputs used by investors to inform their decision-making, alongside financial statement analysis, management meetings, sell-side reports, proprietary research, and financial modeling. They provide objective, independent, and forward-looking assessments of an issuer's likelihood of repaying debts on time and in full.
Credit rating scales provide a standardized framework for assessing creditworthiness, using letter designations (from AAA to D) that categorize debt into investment grade (BBB- and above) and speculative grade (BB+ and below).
Credit ratings are calculated/determined through a combination of quantitative financial metrics (such as debt ratios, cash flow, and liquidity) and qualitative factors (such as competitive position, industry dynamics, and management effectiveness). Rating committees of experienced analysts make final determinations through deliberative discussion, with continuous monitoring thereafter.
The credit rating methodology and process emphasizes analytical independence, consistency, and transparency to provide reliable opinions on relative credit risk.
About Our Credit Ratings
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Performance of Ratings
Performance of Ratings
Higher ratings have shown lower defaults.
Our credit ratings have shown strong performance over time as effective measures of relative creditworthiness: Our studies have shown that the higher the ratings, the lower the default rates, and vice-versa.
For example, our historical statistics show a 3-year cumulative default rate for a ‘BBB’ rated company of 0.91%, vs 4.17% for a ‘BB’ rated one, 12.41% for a ‘B’ rated one and 45.67% for a ‘CCC/CC’ rated one.
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Rating Changes
Ratings Changes
Ratings change to reflect a current opinion of credit risks.
Credit ratings are designed to be dynamic, and they evolve to reflect changes to market conditions or issuer-specific credit factors. They are not designed to be static. We change ratings if and when our view of credit risk changes.
We do this based on our analysis of relevant information, and in line with our published methodologies. Because ratings evolve over time to reflect economic and market developments or issuer-specific credit drivers, they are seen to provide valuable opinions about current credit risk.
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How We Have Evolved
How We Have Evolved
Ratings agencies: What has changed?
Driven by lessons learned from the financial crisis and new regulations introduced around the world, we invested heavily to further the quality, transparency, and integrity of our ratings.
We emerged as a stronger organization and encourage you to read on for additional detail on both action S&P Global Ratings has taken and the significant regulatory changes made globally.
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Business Model
Business Model
We believe in market choice.
S&P Global Ratings uses the issuer-pays business model. Under this model, rating agencies charge issuers for providing a rating. The model promotes transparency by allowing ratings to be released publicly free of charge — meaning they’re scrutinized every day by all corners of the market, the media, and academia. It also provides rating agencies with access to high-quality information from issuers that might not otherwise be available and enhances the quality of analysis.
We have safeguards to identify and manage potential conflicts of interest, from which no business model is immune. For example, we clearly separate out commercial and analytical functions, and restrict communications between sales personnel and ratings analysts. We comply with regulations around the globe, which impose strict rules on who we manage, and disclose any conflicts.
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Use of Ratings
Use of Ratings
Credit ratings are one of several inputs investors (e.g., portfolio managers and analysts at mutual funds, pension funds, insurance companies, and university endowments) may use in their decision-making process. Other factors could include, for example, analyzing the issuer’s financial statements and SEC filings, meeting with company management, reviewing sell side analyst reports, conducting proprietary research, and building financial models. Credit ratings add to the mix of inputs available to investors’ objective, independent, forward-looking assessments on an ongoing basis of the relative likelihood of whether an issuer may repay its debts on time and in full.
Credit ratings do not speak to investment merits.
Our Values
S&P Global Ratings is committed to providing transparency to the market through high-quality independent opinions on creditworthiness. Safeguarding the quality, independence and integrity of our ratings, including by identifying and managing potential conflicts of interest, is embedded in our culture and at the core of everything we do.
We have been subject to regulatory oversight for over a decade. We are currently overseen by more than 20 regulators around the globe.
Ratings Process
There are 8 Steps in our Ratings Process
Credit ratings are assigned by committees composed of analysts, experts in each asset class, which consider a broad range of financial and business attributes, along with other factors, such as competitive position, business risk profile and the current economic environment, in the application of the relevant methodologies.
Ratings Scale
We continuously work to refine our ratings to uphold the highest level of excellence. To measure performance, we conduct studies that assess how much a rating has moved up or down over a given period, also known as its transition rate. As part of ratings surveillance, we continuously analyze real-time and historical data.
It is because our ratings evolve over time to reflect changes to market or issuer-specific credit drivers that they are seen to have value as one of several factors market participants may consider when assessing credit risk. If we see events taking place that impact our view on an issuer’s relative creditworthiness, we adjust our ratings accordingly to communicate our views so the market has the correct perception of how we view relative creditworthiness.
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AAA
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AA
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A
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BBB
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BB
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B
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CCC
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CC
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C
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D
What is a AAA rating?
A AAA credit rating is the highest possible rating assigned by S&P Global Ratings, representing an extremely strong capacity to meet financial commitments. Entities with a AAA rating are considered to have the lowest credit risk, making them highly attractive to investors. This rating indicates that the issuer is highly likely to fulfill its financial obligations without any risk of default, reflecting a robust financial position and operational stability.
What is a AA rating?
A AA credit rating signifies a very strong capacity to meet financial commitments, although it is somewhat more susceptible to adverse economic conditions than AAA-rated entities. This rating reflects high quality and low credit risk, indicating that the issuer is likely to fulfill its obligations, even in challenging economic environments. Investors view AA-rated entities as reliable, but with a slightly higher risk compared to those rated AAA.
What is an A rating?
An A credit rating indicates a strong capacity to meet financial commitments, but it is more susceptible to adverse economic conditions. Entities rated A are generally stable and financially sound, yet they may face challenges during economic downturns or periods of financial instability. This rating suggests that while the issuer is likely to meet its obligations, there is a moderate level of risk involved.
What is a BBB rating?
A BBB credit rating represents an adequate capacity to meet financial commitments, but it is more subject to adverse economic conditions. This rating is considered investment grade, indicating moderate risk. Entities rated BBB are viewed as having a reasonable likelihood of fulfilling their obligations, but investors should be aware that economic shifts could impact their financial stability.
What is a BB rating?
A BB credit rating indicates that an entity is less vulnerable in the near term, but faces major ongoing uncertainties. This rating reflects a speculative nature, suggesting that the entity may be more impacted by economic downturns or other adverse conditions. While BB-rated entities might currently manage their obligations, investors should be cautious due to potential volatility.
What is a B rating?
A B credit rating signifies that an entity is more vulnerable to adverse business, financial, or economic conditions, yet currently has the capacity to meet financial commitments. This rating indicates a higher level of risk, suggesting that while the issuer may be able to meet its obligations now, future challenges could jeopardize its financial health.
What is a CCC rating?
A CCC credit rating indicates that an entity is currently vulnerable and dependent on favorable business, financial, and economic conditions to meet its financial commitments. This rating suggests a significant risk of default, meaning that the issuer's ability to fulfill its obligations is highly uncertain and contingent on external factors.
What is a CC rating?
A CC credit rating signifies that an entity is highly vulnerable, with default being a real possibility. This rating indicates that the entity is in distress and may not be able to meet its obligations. Investors should be aware that entities rated CC face severe financial challenges and may be at risk of defaulting on their debts.
What is a C rating?
A C credit rating indicates that an entity is highly vulnerable to nonpayment, and the likelihood of default is almost certain. This rating reflects a critical financial situation where the issuer is struggling to meet its obligations. Investors should approach entities rated C with extreme caution, as they are at a very high risk of default.
What is a D rating?
A D credit rating signifies default, meaning that payment has not been made on the due date. This rating indicates that the entity is unable to meet its financial obligations, and investors should consider their investments in such entities to be at high risk. A D rating serves as a clear warning that the issuer is in default status.
Frequently Asked Questions
The following are frequently asked questions about credit ratings and what entitles a positive or negative rating.
Methodology
How are credit ratings determined/calculated? What are credit ratings based on?
Credit ratings are determined through a comprehensive analytical process that combines quantitative financial analysis with qualitative assessments of business fundamentals. S&P Global Ratings employs specialized methodologies tailored to different sectors (corporate, government, financial institutions, etc.), with analysts evaluating both the ability and willingness of an issuer to meet financial obligations based on established credit ratings criteria.
The process typically begins with gathering extensive information from public sources and direct engagement with the issuer's management team to understand strategic direction, financial policies, and risk management practices. The quantitative foundation of credit ratings involves analyzing key financial metrics and ratios that measure profitability, leverage, cash flow adequacy, and liquidity. For corporations, analysts examine indicators such as debt-to-EBITDA ratios, interest coverage ratios, free cash flow generation, and capital structure sustainability. These financial measures are assessed both in absolute terms and relative to industry peers, with consideration given to historical performance trends and future projections.
However, credit ratings are not determined by financial metrics alone—qualitative factors often carry equal or greater weight in the final rating decision. Qualitative assessment areas include business risk profile elements such as competitive position, industry dynamics, geographic diversification, regulatory environment, and management effectiveness. For sovereign ratings, analysts evaluate political institutions, economic structure and growth prospects, external finances, fiscal performance, and monetary flexibility. The rating process also incorporates forward-looking scenarios to test resilience under stress conditions, with analysts considering how an entity might perform during industry downturns or economic recessions.
Rating committees—groups of experienced analysts with diverse expertise—ultimately determine credit ratings through deliberative discussions where analytical perspectives are debated before reaching a consensus decision. Once established, credit ratings undergo continuous surveillance to identify material changes in credit quality, with formal reviews typically conducted annually or when significant developments occur. Throughout this process, S&P Global Ratings strives to maintain analytical independence, consistency across similar issuers, and transparency regarding its methodologies and ratings criteria, ensuring that ratings represent well-informed opinions on relative credit risk that investors and market participants can use alongside other factors in their decision-making processes.
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