Bangkok--12 Oct--Standard & Poor's
Corporate credit ratings, outlooks, and CreditWatch listings serve as useful benchmarks for borrowing costs, said an article published today by Standard & Poor's, titled "The Relationship Between Corporate Credit Ratings And The Cost Of Debt." Ratings and cost of debt have a negative correlation--meaning the cost usually rises as ratings decline. This relationship historically has held up well.
"Numerous other factors can affect a bond's price, such as liquidity in the issue, and are not captured in Standard & Poor's Ratings Services' rating on a company," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "However, issue and issuer ratings are useful in determining the margins that corporate issuers pay compared with risk—free Treasuries to access the capital markets."
When looking at Standard & Poor's corporate bond indices by rating category, it is clear that the bond spreads tend to fall in rank order with ratings. For example, the risk premium on a typical 'A' rated issue is lower than the premium on an issue rated 'BBB'.
The relationship between ratings and yields also holds true across the maturity curve. Lower ratings yield more at each maturity point.
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