Rating downgrade of debt security: What does it mean?

1. Rating downgrade is a negative change in the credit rating of a debt security.

2. To denote the highest credit quality, AAA symbol is used. This is followed by symbols AA, A, BBB, BB, B, C and D. The last is the lowest rating, indicating likelihood of a default.

3. Rating downgrade indicates that the business environment and/or financials of the issuer have deteriorated and the ability to repay interest and borrowing on time may not be possible.

4. Rating downgrade results in losses for investors as there is a fall in the price of the debt instrument.

5. Before a rating downgrade, the security is placed on a ratings watch, which is an indicator to monitor and take corrective action.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)