Explainer: What Moody's different ratings mean

The Moody's Investors Service (Moody's) today downgraded the government of Bangladesh's long-term issuer and senior unsecured ratings to B1 from Ba3 and affirmed short term issuer ratings at Not Prime.

Debt investments can be rated by Moody's Investor Service, a credit rating organisation.

But how does it all work?

Who is Moody's?

Moody's Investor Service and Moody's Analytics are subsidiaries of the financial services firm Moody's Corporation.

Prior to 2008, the firm was known as Moody's Investors Service, but in that year, it rebranded as Moody's Analytics.

The main difference between the two companies is that Moody's Investors Service focuses on credit ratings, whereas Moody's Analytics focuses on non-credit rating activities.

It is to be noted that Moody's is one of three prominent companies that evaluate the creditworthiness of bonds. The others are Fitch and Standard & Poor's (S&P). These organisations determine the bond's rating, which influences the return offered to investors. In general, the lower the credit rating, the greater the yield.

Types of bond ratings

Moody's Investors Service provides investors with credit evaluations that inform them of the likelihood of default and the severity of potential losses. The credit ratings are comparative, meaning that they evaluate borrowers based on the probability of default and loss, allowing investors to make broader comparisons. They are not absolute indicators of risk.

These evaluations are accessible to the public and encompass a vast array of markets, industries, and geographies. The table below provides an overview of Moody's bond ratings and their respective meanings.

A credit rating evaluates the creditworthiness and likelihood of default of an organisation, providing a valuable evaluation instrument for analysing an investment. The table demonstrates that Moody's credit ratings are conveyed as alphabetical grades.

Obviously, there is a loss risk associated with all ratings, including investment-grade ratings. In general, however, the risk of loss rises as one descends the rating scale.

What do the new ratings mean?

Ba3/BB- is the bond rating assigned to debt instruments that are considered speculative in nature, according to Investopedia.

Moody's credit rating service assigns a long-term bond rating of Ba3, whereas Standard & Poor's and Fitch both assign a parallel rating of BB-.

B1/B+ is one of several "junk" credit ratings that may be assigned to a company, fixed-income security, or floating-rate loan (FRN).

This rating indicates that the issuer carries a greater-than-average probability of default. B1/B+ classifications are just below investment grade, but they are the highest in the non-investment grade category.

Moody's Investors Service uses the B1 rating, while S&P Global Ratings and Fitch Ratings use the B+ rating.

The credit rating assigned to fixed income securities is a measure of the security's riskiness and the issuer's likelihood of defaulting on the debt.

The credit rating of a bond reflects the creditworthiness of corporate or government bonds.

Government bonds or investment-grade corporate bonds with AAA to Baa3/BBB- ratings are secure options for risk-averse investors seeking to avoid the possibility of losing their principal investments.

A B1/B+ rating is considered speculative, high-yield (HY), or junk. Thus, the bond's yield is typically higher than that of an investment-grade security to compensate the bond investor for the increased risk of payment default.

Typically, the rating of the issue and the rating of the issuer are identical, but they may differ if, for instance, the issue is enhanced with additional credit protection for investors.

Junk bonds are bonds that bear a higher level of risk than investment-grade bonds.

As compensation for taking on a high level of risk, investors seek a higher yield when purchasing such bonds. Consequently, these bonds are also known as high yield bonds. Moody's, Standard & Poor's, and Fitch Ratings typically assign a credit rating of Ba3/BB- to non-investment-grade bonds that fall towards the more stable end of the junk-bond rating spectrum.

Even though this is the highest rating tier within the high yield bond category, a Ba3/BB- rating indicates a greater degree of concern that deteriorating economic conditions and/or company-specific developments may hinder the issuer's ability to meet its obligations. Ba2/BB is the grade immediately above Ba3/BB-, while B1/B+ is the rating immediately below.

Countries with highest and lowest Moody's ratings

The following countries have the highest Moody's credit ratings (Aaa) in 2023 - Australia, Canada, Denmark, Germany, Luxembourg, Netherlands, Switzerland, Norway, Sweden, European Union, Singapore, and the United States, according to tradingeconomics.com

Meanwhile, Lebanon and Venezuela are the two countries to have bagged the lowest Moody's rating "C".