AAA - Rating

Posted in Finance, Accounting and Economics Terms, Total Reads: 2418

Definition: AAA - Rating

The ‘triple A’ rating is the highest rating given to an obligor by Credit Rating Agencies, that tells that the obligor’s capacity to meet its financial commitments, in full and on time, are extremely strong.

AAA rating tells about the high credit worthiness of the debtor. The rating is done by Credit Rating Agencies such as Moody’s, Standard and Poor’s, Fitch and Dominion Bond Rating Service (DBRS) based on public and private information. They evaluate the obligor’s ability to pay back the debt and its likelihood of default. Moody’s Aaa rating is similar concept and analogous to the AAA rating given by other agencies.

Each agency uses a different methodology to measure creditworthiness and uses a specific rating scale. So the rating is the agency’s opinion of relative level risk of Credit Risk that the issuer carries from strongest to weakest within a universe of credit risk. So one point to note here is that AAA rating is not a guarantee that the borrower would never default, instead there is less chance of defaulting of AAA rated issuer that of a BBB rated issuer. The main implication here is that an AAA rated borrower usually secures loans at lower interest rate as they are perceived to be able to repay the debt without default.

For example:

Credit rating of Australia stands at AAA by Standard & Poor and Fitch and Aaa by Moody’s. This is based on a solid economy and low government spending. By 2012, its economy had grown by an average of 3.5% a year for more than 20 years and the government debt-to-GDP ratio was 27.9%.

Hence, this concludes the definition of AAA - Rating along with its overview.

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