Moody's credit rating is what many corporate lenders listen to when assessing a business or corporation for a loan. Founded in 1909, Moody's corporation does many things such as financial research on commercial businesses. They also will perform analysis on different government agencies. Businesses and large corporations are factored differently when it comes to finance. The large financial amounts of some of the contracts made cannot be handled by conventional banks and lending institutions. It is a matter more or less of determining if the company will be able to finish the project, research, or development which is intended to generate a large amount of money for the investors. The risks are great for some companies who are running with a shortage in cash flow. Some companies do not have any problems meeting their financial obligations and can finance the project on their own. Many times it comes down to whether another company should be doing business with the first one because of their Moody credit rating.
Some companies have a policy of whom they will do business with and who they will not. If a company does not have a Dunn and Bradstreet rating or a Moody's credit rating, then credit will not be extended. At times, there is a certain score the new business must meet to even associate itself with other companies. This is true of some of the exclusive products being carried. The larger supplier wants to make sure its merchandise is going to a store or company, which will not jeopardize the reputation of the product. With the credit rating, the supplier knows the buying company is reputable and has good business ethics.
Moody's credit rating has three grades:
The investment grade can have several ratings in itself. The scale is broke down like this:
Aaa - this is considered the highest level rating available. There is hardly any credit risk.
Aa1, Aa2, Aa3 - this sector is considered a low risk grade. Upper-medium is the term used.
Baa1, Baa2, Baa3 - the companies, which fall into this category, may have some risk involved with lending to them.
The Speculative grade of Moody's credit rating is sometimes called 'Junk' ratings. The scale is broke down like this.
Ba1, Ba2, Ba3 - there may be some credit risk factors involved with these companies. Lenders should be cautious.
B1, B2, B3 - these companies are considered high risk in the lending field.
Caa1, Caa2, Caa3 - these businesses and companies are in poor standing. They are considered to be a very high risk.
Ca - this is the group that may be close to default with the ability to still recover some of the principal.
C - this is a company that is clearly in default with little to no chance of recovering the principal.
There is another class, which is classified as "special". This is for groups whose rating has been withdrawn (WR), not rated (NR), or provisional (P).
Moody's credit rating does not just end there. The company rates businesses for short-term loans as well. These ratings are based on whether the company will be able to pay back the financial obligation in a time frame that does not exceed 13 months.
What has been learned of late is that even Moody's credit rating system can be wrong. There were some rather large losses when companies who had a Aaa rating with Moody's could not honor their obligations. One such incident resulted in a loss of $125 million despite the high rating.
Author John White can teach you what you need to know about credit ratings. You can also learn about how the FICO Score affects you.
