In this section
Credit ratings explained ...
According to the RBNZ, a credit rating is an independent opinion of the capability and willingness of a financial institution or company to repay its debts – in other words, its financial strength or creditworthiness.
Credit ratings are issued by independent rating agencies, such as the internationally recognised Standard & Poor’s, Fitch Ratings and Moody’s Investors Services. The rating is usually calculated as the likelihood of a failure occurring over a given period and is expressed as an alphabetical rating, with the higher rating e.g. ‘AAA’, being superior (having a lower chance of default) to a lower rating e.g. ‘C’ (a higher risk of default).
"Junk bonds": In finance, a high-yield bond (also known as a non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive to investors.
Rating agencies look at a range of financial measures when they assess an organisation’s financial strength, as well as external industry-related issues and the quality of management and internal processes.
There are a number of resources available to find out more about Credit Ratings. (This page actually relates only to Corporate Credit Ratings. There are also Issue Credit Ratings which apply to a individual issue of debt. An individual Issue Credit Rating can be different from a Corporate Credit Rating due to the the terms of the issue - for example, if it is 'subordinated'.)
The Reserve Bank of New Zealand is the principal regulator of banks, non-bank deposit takers, and insurance companies, in New Zealand. They have produced documents which explain how these ratings apply in New Zealand here » and here »
The Financial Markets Authority (FMA) also has information about credit ratings here » It has some useful tables relating specific ratings to historical default rates.
The authoritative source is always the credit rating company's own webpages ...
Some readers may find these Wikipedia links easier to understand.
Here is a graphic that attempts to summarise the various ratings codes used. This graphic is not an offical comparison, however.