Overview
Measuring credit risk is hard task. This is in part due to the fact that credit instruments and the companies that issue them are not homogenous, and therefore a straightforward statistical assessment becomes difficult.
Because of the difficulty of creating credit risk models for publicly traded loans, some companies (the rating agencies) have created their own credit models of publicly traded instruments which they sell. There are two prominent rating agencies.
Rating agency ratings provide an objective set of third party risk assessments that can be used by fund managers to provide risk limits on the assets they will invest in.
Moodys
Moodys assigns one of the following ranked ratings to the bonds it assesses.
Aaa,Aa1,Aa2,Aa3,A1,A2,A3, Baa1,Baa2,Baa3,
Ba1,Ba2,Ba3,B1, B2,B3,Caa1,Caa2,Caa3,Ca,C
Ratings above Ba1 are deemed to be investment grade, and Ba1 rated bonds and lower are speculative (sometimes called junk).
S&P
S&P assigns one of the following ranked ratings to the bonds it assesses.
AAA,AA+,AA,AA-,A+,A,BBB,BB,B,CCC,CC,C,R,SD,D,NR
Ratings above BB are deemed to be investment grade, and BB rated bonds and lower are speculative (sometimes called junk).