The realm of credit ratings is complex and intricate, brimming with terms and designations that may seem perplexing to the uninitiated. Among these are the Ba2/BB credit ratings, a critical classification from Moody's Investors Service and S&P Global Ratings, respectively. These ratings signify a higher degree of default risk, placing the issuers or credit issues squarely within the non-investment grade or, more colloquially, the 'junk' or 'high-yield' category.
Ba2/BB are the second-highest ratings in the sub-investment grade spectrum. These credit ratings are seen as more speculative, falling just below investment grade. In Moody's rating scheme, Ba2 situates above Ba3 and below Ba1, while in the S&P and Fitch classifications, BB is above BB- and below BB+. By illuminating the creditworthiness of new issues, these ratings are instrumental in aiding transparency and price discovery for investors.
Peeling back the layers of Ba2/BB, it becomes clear that these ratings, like all others devised by credit rating agencies, are accompanied by comprehensive guidelines. These guidelines apply not only to the credit instrument being issued but also to the entity responsible for issuing that instrument. For instance, the B rating of S&P and Fitch, and B2 rating of Moody's indicates a moderate default risk but higher yield potential for a bond issue.
Assessing the risk of default for bonds is the fundamental responsibility of the 'Big Three' ratings institutions: Moody's, Fitch, and S&P. Given that the latter two employ identical symbol systems, it is common for a company to have the same rating from both institutions if their respective algorithms and analysts draw similar conclusions, such as a “B” rating. Within the broader rating hierarchy, B2/B ratings are the 15th rating, descending from the top-notch AAA/Aaa.
It is vital to underscore that a bond carrying a B2/BB rating is considered a highly speculative investment. While it has a moderate risk of default, it also promises high-yield returns. Default in this context refers to situations where a scheduled payment is overdue by more than 60 days. Statistical analyses suggest that a bond in the B range is about 20% likely to default. However, an equal chance exists that a bond, once defaulted, will resume payments in the near future - a phenomenon termed as the 'recovery rate'.
Such speculative bonds are often called 'high yield bonds' or 'junk bonds.' The label 'junk' might imply a lack of value, but in fact, the term reflects the higher risk associated with these bonds, which can deliver substantial returns if the issuer does not default.
In addition to bonds, the same rating system also applies to corporations and insurance companies. Thus, the B2/B ratings offer a window into the fiscal health of companies and insurers, providing investors with a meaningful, albeit more speculative, opportunity to invest.
The Ba2/BB ratings represent an intriguing intersection of risk and potential reward in the bond market. They underscore the more speculative aspects of investment, serving as a reminder that higher yields often come hand in hand with increased risks. Such information is instrumental in enabling investors to make informed decisions and manage their portfolios effectively.
Summary
B — S&P / Fitch
B2 — Moody’s
A bond issue that has a moderate chance of default but a high yield might be given a B2/B rating by the major ratings institutions.
Bonds are rated based on their risk of default by the Big Three ratings institutions: Moody’s, Fitch, and S&P. The latter two use the same symbols, so if the algorithms and analysts at the two ratings institutions come to similar conclusions, a company might have the same rating from each of them, such as the “B” in this example. B2/B ratings are the 15th ratings down the scale from the top rating of AAA/Aaa.
A bond with such a rating is considered a highly speculative investment. It has a moderate risk of default, but a high yield payout. Default means that a scheduled payment is more than 60 days overdue.
A bond in the B range has about a 20% chance of defaulting, and there is about a 20% chance that an already-defaulted bond will resume payments in the near future, which is called the recovery rate.
Speculative bonds such as this are called “high yield bonds” or “junk bonds.”
The same ratings system also applies to companies and insurers.
What is a Credit Rating?
What are Bond Ratings?
