Credit ratings by letter are assigned by three U.S. agencies: Standard & Poor's, Fitch, and Moody's. These rating agencies are the "big three" that investors analyze. Their ratings range from A to D with pluses and minuses applied to each to indicate how likely it is that a borrower will repay its debt.
Higher ratings come with triple letters. Grades that come with a plus are better than those with a minus.
Key Takeaways
- The S&P and Fitch AAA ratings are the highest assigned to any debt issuer.
- An AAA rating is the equivalent of the Aaa rating issued by Moody's.
- AAA ratings are issued to investment-grade debt that has a high level of creditworthiness with the strongest capacity to repay investors.
- The AA+ rating issued by S&P and Fitch is similar to the Aa1 rating issued by Moody's.
- The AA+ rating comes with very low credit risk and indicates that the issuer has a strong capacity to repay its debts.
An Example of Ratings
Finance professionals were kept awake after (S&P)announced in August 2011 that it was downgrading its credit rating on the U.S. from AAA to AA+. Then Fitch followed suit on Aug. 1, 2023, also dropping the U.S. rating from AAA to AA+.
The news sent shock waves across the world in 2011 and the vibrations were felt even more the following week when the market dropped over 6% by the end of the day. But that market decline was benign compared to the individual beatings some stocks endured.
China also found itself on the chopping block on May 24, 2017, when rating agency Moody's downgraded the country's credit rating as growth slowed and debt increased. So why do people care about this and what do these ratings mean?
S&P and Fitch Ratings
Standard & Poor's and Fitch rate the debt of countries and companies based on these letter grades. The firms create their ratings from information such as annual reports, news articles, and company management. Analysts from S&P and Fitch consider a company's or country's financial situation and other determining factors.
What Does AAA Mean?
The S&P and Fitch AAA rating is the highest that can be assigned to any issuer of debt. It's the same as the Aaa rating issued by Moody's. This rating is assigned to investment-grade debt that has a high level of creditworthiness. Debt issuers with the highest ratings have the strongest capacity to repay investors. Their strong financial positions give them the lowest chance of default.
Eleven countries had the strongest AAA rating from S&P as of June 2023: Australia, Canada, Denmark, Germany, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden and Switzerland.
What Does AA+ Mean?
The AA+ rating is issued by S&P and Fitch and is similar to the Aa1 rating issued by Moody's. This rating is still of high quality but it falls below the AAA ranking. It comes with very low credit risk even though long-term risks may affect these investments.
The AA+ rating is one of the rankings for investment-grade debt. Investments that are rated with an AA+ rating are financially strong and have a strong likelihood of repaying their debts, making the chance of default very low.
The S&P and Fitch ratings for the United States still sit at AA+ with a stable outlook as of August 2023. The fact that the U.S., the world's largest economy, went from AAA to AA+ for only the second time in history is a big deal. The downgrade was painful in terms of stature. But Moody's has continued to give the country an Aaa rating, citing a stable outlook as well.
Does the U.S. Still Have an AAA Credit Rating?
Yes, at least from DBRS and Moody’s. DBRS has the U.S. rated at AAA with a stable outlook and Moody’s rating for the U.S. is Aaa with a stable outlook.
What Is the Credit Rating of the U.S.?
The U.S. credit rating is Aaa, according to Moody’s. S&P and Fitch have the U.S. rated at AA+.
When Did the U.S. Lose Its AAA Credit Rating?
The U.S. was downgraded from AAA to AA+ in August 2011 by S&P and in August 2023 by Fitch. Both agencies have cited the declining predictability of policymaking and last-minute policymaking.
The Bottom Line
The difference doesn't really seem to matter whether your investment holds an AAA or AA+ rating. What always matters in this game is valuation and patience. Sticking to the simple philosophy of buying an asset below its long-term intrinsic value should ultimately lead to satisfactory results. It's a philosophy that is indeed simple to understand yet difficult to execute for most investors.
