BB+ (credit rating)

What is BB credit rating?

A BB credit rating refers to a rating assigned by Standard & Poor's and Fitch credit agencies   to indicate creditworthiness of a bond-issuer,  such as a corporation or a government, and the likelihood of default on its bonds.  

BB -rated bonds are non-investment grade, which suggests  a relatively high credit risk. It signifies that the borrower's ability to meet its financial obligations is considered to be speculative or "junk”. BB is equivalent to Moody's Ba2 rating.

Key takeaways

Understanding BB credit rating

Credit ratings first originated in 1841, when the US Mercantile Agency provided credit reports and ratings of businesses. In 1900 John Moody published the first bond ratings in a book called Moody’s Manual of Industrial and Miscellaneous Securities. This book provided investors with information on creditworthiness of bond issuers and helped them make more informed decisions. 

After Moody’s manual, other agencies started to emerge. Standard Statistics was founded in 1906 to publish company and government bond credit ratings. It later merged with Poor’s Corporation into what today is known as Standard & Poor’s. Meanwhile, Fitch was established in 1913, and ten years later introduced the AAA through D rating system. 

Ratings on corporate bonds are typically updated annually or as needed if there are significant changes to the issuer's credit profile. Ratings on government bonds, on the other hand, may be updated less frequently, as they tend to have more stable credit profiles.

How does credit rating affect bonds

When a credit rating agency updates its rating on a bond, it has an immediate impact on the bond's price and yield.

• Bond’s price: If the bond is upgraded, showing that the issuer's creditworthiness has improved, the bond’s price may rise as investors are willing to pay more for improved credit. However, if it is downgraded, signalling increased credit risk, the bond’s price may fall.

• Bond’s yield: A bond’s yield refers to the percentage of return an investor receives over the term of the bond’s maturity. An upgrade of a bond’s credit rating would decrease the bond’s yield as the bond’s issuer would become more creditworthy. A downgrade, on the other hand, would typically increase the bond’s yield to offset the higher risk associated with it. 

A bond with a BB rating is considered as non-investment grade, which is commonly referred to as high-yield or junk bond. This means that the issuer of the bond has an elevated risk of defaulting on their debt obligations and therefore the bond carries a higher risk, yet also pays higher yields. 

Key features of a BB rating

• Lower credit quality: BB-rated securities are considered to be lower credit quality debt securities, which means they may be more vulnerable to economic or financial stress. 

• Higher yields: Investors who invest in non-investment grade bonds generally demand higher yields to compensate for the increased risk of default. The higher yields reflect the higher credit risk associated with BB-rated securities.

• Non-investment grade: BB ratings are considered non-investment grade or speculative ratings, indicating that the bonds carry a higher risk of default compared to investment-grade securities.

• Lower liquidity: BB-rated securities may have lower liquidity than investment-grade securities, as they may not be as widely traded in the market.

BB+ vs BB- vs BB: What's the difference?

BB+ credit rating is a notch above BB, indicating a slightly lower credit risk, and BB- credit rating is a notch below BB, indicating a slightly higher credit risk.

• BB+ credit rating: A BB+ rating is a slightly lower credit risk compared to a BB rating. Borrowers with a BB+ rating have a somewhat stronger ability to meet their financial commitments, but they are still vulnerable to adverse economic conditions or changes in circumstances.

• BB- credit rating: A BB- rating indicates a higher credit risk compared to a BB rating. Borrowers with a BB- rating have a somewhat weaker ability to meet their financial commitments, and they are more vulnerable to adverse economic conditions or changes in circumstances.

Note that BB+, BB and BB- are credit ratings specific to Standard & Poor and Fitch credit agencies. At Moody’s Ba1, Ba2 and Ba3 would be equivalent ratings respectively. 

Factors affecting BB credit rating

Credit rating agencies use a combination of factors specific to each borrower to assign credit ratings. Bond investors use credit ratings to assess the creditworthiness of borrowers and to determine the risk associated with investing in debt securities.

Generally, the factors affecting the credit rating would depend on the nature of the borrower, and, for example, would be different for corporate and government bonds.  

Credit ratings of governments

• Economic factors: Economic conditions can have a significant impact on a borrower's credit rating.  Factors such as gross domestic product (GDP) growth, inflation, interest rates, and unemployment rates can affect a borrower's ability to meet its financial commitments.

• Political factors: Governments with a stable political environment and low debt are likely to receive a higher rating, compared to a government with a weak economy and high debt.

Credit ratings of companies

• Industry factors: The industry in which a borrower operates can also affect its credit rating. Factors such as competition, technological change, and regulatory changes can affect a firm’s financial performance.

• Company-specific factors: Credit rating agencies also consider factors specific to a business, such as its financial strength, its ability to generate cash flow, its level of indebtedness, and the quality of its management. Other factors, such as litigation, changes in ownership, and strategic changes, can also affect a company’s credit rating.

Significance of BB credit rating

Bond investors use credit ratings to assess the creditworthiness of a bond issuer and to determine the risk associated with investing in debt securities. A BB rating indicates an evaluated risk, which means that investors may perceive investments in the debt securities as speculative, and typically would require a higher yield. 

Investors may also use credit ratings to compare different investment options and make decisions. A BB rating may cause some investors to avoid buying a particular bond, particularly if the investor has a low risk tolerance. This can make it more difficult for debt issuers to raise capital.

Conclusion

In conclusion, the BB credit rating is a critical assessment tool utilised by bond investors to gauge the creditworthiness and risk associated with bonds issued by corporations or governments. 

As a non-investment grade rating, it signifies an elevated risk of default, placing these bonds within the high-yield or "junk" category. Due to the heightened risk, BB-rated bonds offer higher yields, which may attract investors who are willing to assume more risk for the potential of greater returns.

Credit ratings such as BB, BB+, and BB- are assigned by agencies like Standard & Poor's and Fitch, while Moody's employs a similar, albeit different, rating scale. Various factors influence these ratings. For governments, economic conditions and political stability are key determinants, while for companies, industry factors and company-specific attributes are considered.

The importance of credit ratings cannot be overstated, as they directly impact the decisions made by bond investors and traders. These ratings influence not only the bond's price and yield but also the overall perception of the issuer's creditworthiness. Investors may avoid BB-rated bonds if they have a low-risk tolerance, potentially making it more challenging for issuers with such ratings to raise capital.

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