A credit rating can be an indicator of the riskiness of an investment, especially fixed interest investments. The rating actually applies to the organisation offering the investment, and is the rating agency's assessment of the likelihood that the organisation will default and investors will lose money.
In New Zealand, a credit rating is required by most banks, finance companies, building societies, credit unions and other non-bank organisations taking deposits from the public. The rating must come from one of three agencies approved by the Reserve Bank - Standard and Poor's, Moody's Investor Services and Fitch.
A good credit rating doesn't mean the investment is risk-free. It's simply the agency's opinion of the organisation's ability to meet its financial obligations.
Ratings use letters and numbers to indicate risk. The tables below show average default rates for organisations with particular ratings. They show that the riskiness of an investment increases rapidly as the rating goes down from A towards C. They also show that risks increase over time.
Ratings issued by financial advisers can be useful guides but should be treated with caution as they are not from approved agencies.
Just because there's no credit rating doesn't necessarily mean you should avoid the investment. However, you should take extra care to assess the risk. You could ask a financial adviser why there is no credit rating.
Fitch
| Rating | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| AAA | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 |
| AA | 0.04 | 0.04 | 0.00 | 0.02 | 0.05 |
| A | 0.10 | 0.27 | 0.41 | 0.50 | 0.66 |
| BBB | 0.27 | 0.84 | 1.43 | 2.10 | 2.81 |
| BB | 1.52 | 3.60 | 5.17 | 6.32 | 7.51 |
| B | 2.71 | 5.28 | 6.31 | 8.02 | 9.27 |
| CCC to C | 26.39 | 29.41 | 32.10 | 32.95 | 35.31 |
Moody's
| Rating | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Aaa | 0.00 | 0.01 | n/a | 0.00 | 0.02 |
| Aa | 0.02 | 0.04 | 0.06 | 0.07 | 0.14 |
| A | 0.04 | 0.10 | 0.21 | 0.35 | 0.47 |
| Baa | 0.11 | 0.30 | 0.55 | 0.82 | 1.16 |
| Ba | 0.66 | 1.93 | 3.58 | 5.45 | 7.02 |
| B | 2.86 | 6.76 | 10.43 | 13.46 | 15.51 |
| Caa-C | 11.53 | 19.12 | 25.61 | 29.58 | 33.77 |
Data in percent based on issuer-weighted average default rate and on issuer-weighted average senior unsecured bond recovery rates.
Standard & Poor's
| Rating | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| AAA | 0.00 | 0.03 | 0.14 | 0.26 | 0.39 |
| AA | 0.02 | 0.07 | 0.14 | 0.24 | 0.33 |
| A | 0.08 | 0.21 | 0.35 | 0.53 | 0.72 |
| BBB | 0.26 | 0.72 | 1.23 | 1.86 | 2.53 |
| BB | 0.97 | 2.94 | 5.27 | 7.49 | 9.51 |
| B | 4.93 | 10.76 | 15.65 | 19.46 | 22.30 |
| CCC/C | 27.98 | 36.95 | 42.40 | 45.57 | 48.05 |
Source: Standard & Poor's Global Fixed Income Research and Standard & Poor's CreditPro©