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In finance, a rating is the ordinally scaled classification of the creditworthiness of an economic entity ( company , state ) or financial instrument . The classification is usually carried out by a rating agency or a credit institute . Both the procedure for determining the creditworthiness level and its result are referred to as rating. The scale of the creditworthiness grades that can be assigned is also referred to as the “rating scale”, the agreed abbreviations for the creditworthiness marks as the “rating code”.

Word origin

The anglicism "Rating" comes from the English verb "to rate", which means something like "to evaluate" or "to estimate". The English noun "rate" means "ratio" or "quota". The English continuous form “rating”, on the other hand, is “evaluating” or “estimating”. In general, performance appraisals marked with “ratings” are classifications of service companies such as hotels , restaurants , media , companies or even real estate . Nowadays, internet ratings of hotels or restaurants are mostly made unsystematically and subjectively as part of an evaluation by customers. Rating agencies and credit institutions , on the other hand, try to objectify their ratings through systematic financial analysis of past and future-related data on the debtor ( balance sheet analysis ). The Deutsche Bundesbank can also carry out ratings or credit checks.


Poor's Directory of Railroad Officials - Front Page (1893)

The rating has its origins in the USA, where the nationwide spread of the railroad triggered high financing requirements. The capital market that was establishing itself for this purpose was largely anonymous and non-transparent, so that lenders were exposed to a high credit risk . Market transparency improved when Henry Varnum Poor (1812-1905) published the "History of the Railroads and Canals of the United States" in 1860, which contained a first detailed compilation of both the operational and financial situation of the railway companies. Henry Varnum and his son Henry William Poor (1844–1915) published "The Manual of the Railroads of the United States of America" ​​in 1868, of which they were able to sell 2,500 copies within a few months. Henry William Poor founded Poor & Co., an insurance and brokerage company , in 1873 . This merged in 1919 for a short time with John Moody & Co. , a company that in 1900 published the “Moody's Manual of Industrial and Corporation Securities”. The collaboration ended in 1922 when Poor merged with Standard Statistics Inc., which was founded in 1906 by Luther and Lee Blake, to form what is now Standard & Poor’s . This began in 1922 with systematic ratings of corporate bonds. In the meantime, in 1909, John Moody (1868–1950) and his agency Moody’s began to rate stocks and bonds of American railways, and in 1919 bond ratings for municipal bonds were added. The youngest of the three largest agencies today is Fitch Ratings , which was founded on December 24, 1913 by John Knowles Fitch (1880–1943). Archibald M. Crossley developed the "Crossley ratings" for radio programs from March 1930. The improvement of investor protection through the Securities Act of May 1933 and the establishment of the Securities and Exchange Commission (SEC) in June 1934 resulted in the legal recognition of ratings.

The fact that rating agencies did not remain flawless and incorrectly assessed the current creditworthiness of their debtors became evident at the latest in December 1975 with the bail-out of the city of New York City and in December 1994 with the insolvency of the likewise well-rated Orange County with subnational public debtors. In the corporate sector, there were gross misjudgments at Enron (December 2001), WorldCom (July 2002) and Parmalat (December 2003), all of which had to file for bankruptcy not foreseen by the agencies. Misjudgments in mortgage-backed securities ( mortgage-backed securities ) and collateralized debt obligations were finally starting point of the financial crisis from 2007 onwards . In January 2007, ratings of the agencies or internal bank ratings became a legally imposed obligation throughout Europe due to Basel II , in Germany due to the Solvency Regulation . Its function was taken over by the Capital Adequacy Ordinance (CRR) in January 2014 and further tightened the minimum capital requirements for credit risks . According to Art. 113 (1) CRR, credit institutions in the EU member states are obliged to adopt ratings from the rating agencies they have designated when applying the KSA standard approach.


In connection with ratings, some technical terms - also in English - appear:

  • Notch ( English "notch" ) is the name for a rating class (rating level) compared to the next better or worse rating class. The infinitesimal change from one rating class to the next is one notch .
  • Downgrade or upgrade ( English downgrade or English upgrade ) of a rating by at least one “notch” compared to the previous rating for the same rating object.
  • Rating migration is the change in the credit rating over time by upgrading or downgrading. The agencies regularly publish tables with past upgrades and downgrades, from which the probability of an upgrade or downgrade for each credit rating class can be determined as a matrix of transition probabilities.
  • Country ceiling ( German  country ceiling ) is the principle that a debtor in one state may not have a better rating as the state in which the debtor's seat has. The reason for this is that the country risk of this state can represent a limiting factor in the loan servicing by the debtor.
  • Through the Cycle ( German  through the cycle through ): agencies are striving to keep independent of economic influences and therefore largely constant under this philosophy corporate ratings. Temporary, cyclical changes in creditworthiness therefore often have no effect on the rating ( seasonal adjustment ).
  • Fallen angels ( German  fallen angels ) are issuers whose credit rating has deteriorated into the speculative range due to a sudden and unexpected deterioration in risk. They are an indication that the agencies have not seen the significant deterioration in risk or have not yet taken into account against their better judgment.
  • Mapping is the comparison of an internal rating with an external rating for the same rating object. It should show whether and to what extent these ratings differ from one another. The mapping must include a deviation analysis.
  • The Outlook ( German  outlook ) is a statement on the likely direction in which a rating will develop in the short term, medium term or both short and medium term.


Depending on who carries out a rating, a distinction is made between internal and external ratings. Rating agencies create external ratings without taking their own risk , while internal ratings are made by credit institutions or institutional investors such as insurance companies or pension funds because of their own creditors' risk and are not published. Agencies differentiate between solicited and unsolicited ratings, depending on whether they were commissioned by a debtor to perform a rating or not. Agencies and banks differentiate their rating systems according to the type of debtor in country ratings, company ratings, issue ratings or rating systems for natural persons ( credit scoring ). Further refinements are required because of the different balance sheet structures and operational processes (country ratings in ratings of individual regional authorities within a country, company ratings according to company types in non-banks , credit institutions and insurance companies).

The agencies differentiate according to the rating object as follows:

Rating type according to object aims
Debt such as bonds Assessment of the ability to pay interest and repayments over the life of the debt instrument
Emissions rating Assessment of the ability to pay interest and repayments during the term of the issue
Issuer rating Assessment of the ability of an issuer to pay interest and repay due to its senior obligations in general or for derivatives and thus a measure of the risk of insolvency .
Equity titles, share rating Assessment of the company and its share and price risks as well as the probability of a dividend payment
Fund rating: money market funds , bond funds Assessment of the quality of the financial instruments , the fund management , compliance with the investment objectives and strategies, liquidity provision and market risks
Companies : non-banks , credit institutions , insurance companies Assessment of the security of claims of depositors and insured persons
States , countries and their subnational local authorities Judgment on the interest payment and repayment ability of states and their subdivisions


In banking , the debtor quality is classified according to the bank's own criteria ("internal rating") or it is carried out by international rating agencies such as Moody's , Standard & Poor's , Fitch or DBRS ("external rating"). In addition to these large international agencies, which together cover over 97% of the global rating market, there are now nationally operating rating agencies in almost all countries. There are also smaller rating agencies that specialize in assessing creditworthiness in certain business areas (e.g. banks, insurance companies).

With the internal bank rating as well as the external rating offered by the agencies, the probability of default is calculated using mathematical-statistical procedures based on default characteristics and divided into rating levels, which are abbreviated with rating codes. So is AAA (pronounced in English: triple A ) for the highest credit rating , C or even D , however very bad for one. The individual category names differ from agency to agency. Moody's uses numbers as additions, for example A1, A2, A3, while Standard & Poor's adds a “+” or “-”. Transformation tables ensure a comparison of the different rating codes used by the agencies.

As a rule, a debtor with a better rating can obtain outside capital on better terms (lower lending rates ) . In contrast, debtors with a poorer rating have to pay a higher interest rate due to the higher probability of default (credit risk) that is expressed as a result. The difference in interest rates that a debtor has to pay compared to a country with the best creditworthiness is called the credit spread . If this credit spread matches the debtor's rating, a “correct” rating can be assumed. The rating thus influences the cost of capital .

The cost of the rating is usually borne by the commissioning company, but can in principle also be borne by the investor. Due to the information asymmetry between issuer and lender, it is often better to present a bad rating than none, as many investors ignore debtors without a rating. The rating has a long tradition, especially in the USA , and it is almost impossible to raise capital on the capital market without a rating. That is why most of the European companies participating in the capital market have a rating.

Institutional investors such as pension funds are required by law or by their own work instructions to only purchase bonds from debtors who have a certain minimum rating, i.e. are of investment grade . Poor creditworthiness is called “ speculative grade ” to distinguish it. Bonds of speculative creditworthiness be high yield (English or scrap bonds high yield bonds or junk bonds ) mentioned. If the rating of a debtor falls from the investment-worthy area to the speculative area, then the price discounts on its bonds are usually particularly severe - many institutional investors are obliged to sell the stocks held in such an event. Rating migrations thus lead to purchases or sales on the capital market.

Changes in the credit ratings of any state or company announce the rating agencies often by a negative or positive "outlook" (English outlook ) long before publication of the next report rating. For this reason, the bond prices should reflect the new assessment months before the rating report is published. This supports and corresponds to the thesis of medium market efficiency .

In Germany, the major international rating agencies are recognized by the Federal Financial Supervisory Authority . Depending on the recognition, the rating agencies may assign different ratings for different products.

Legal issues

There is a legal definition of the term rating in Article 3 (1a) of the EU Rating Regulation . According to this, rating is a "creditworthiness assessment with regard to a company, a debt instrument or a financial liability, a debt security, a preferred share or another financial instrument or the issuer of such debt instruments, ... which is given using a specified and defined classification process for rating categories." In legal terms, rating refers to the procedure on the one hand and the resulting credit rating on the other.

A distinction must be made between the liability of the agencies for an incorrect rating between the liability to the aggrieved debtor, who has to pay unjustifiably high loan interest due to a bad rating, and the liability to other market participants who have relied on a rating that is too good and thereby were harmed. The American agencies, however, are of the opinion, in accordance with US case law, that they only publish statements of opinion ("opinions") and are therefore not liable for any damage under American law, and see themselves only subject to press law. While their ratings are based on a debtor's past, they also include forecasts. Ratings are based on objective facts ( annual financial statements ), but the selection and weighting of individual rating criteria are subjective. Overall, a rating is therefore not a fact, but a subjective, judgmental conclusion. The exclusion of liability made by the agencies in the context of their general terms and conditions is inadmissible under German law in the event of intent or gross negligence . In the case of intent, an incorrect rating can be assumed to result in tortious liability on the part of the agencies in accordance with Section 823 (1) BGB . A claim under Section 826 of the German Civil Code (BGB) for intentional immoral damage is likely to fail due to problems of evidence.

Methodology and rating systems

The agencies give only a few details about their rating methods, and banking associations have so far refused to disclose the rating methods. The rating method deals with the selection of features (default), the creation of features (definition) and the condensation of features (weighting) using a mathematical-statistical model. The rating method includes, among other things, the selection of the rating criteria (such as business indicators such as the equity ratio for companies) and their weighting within the framework of all selected criteria. The rating class assigned to a rating object is the result of the compression of individual creditworthiness criteria. The number of notches in a rating scale is also part of the rating method. The more notches there are, the higher the selectivity and migration probability, since even the slightest changes in risk trigger a rating migration. The period for the duration of a rating forecast leads to long-term (up to 12 months) or long-term ratings (up to 4 years). Each rating class is assigned an individual default probability ( calibrated ), so that all debtors belonging to a rating class have the same default probability. In the opinion of the Bundesbank, a rating system is considered to be well calibrated if the estimated probabilities of default do not deviate at all or only slightly from the actual default rates.

Course of a rating

The rating of companies is primarily based on meaningful indicators for assessing the liquidity situation (debt ratio, interest coverage ratio). Based on their experience, these liquidity indicators allow the rating agencies to realistically assign them to different rating levels. In addition, the business model (or the business risk) is always examined in detail. For example, a company with an exceptionally stable business model and an impressive level of debt (net debt / EBITDA <1.5) is rated AAA by Standard & Poor's. The weaker or more vulnerable the business model, the worse the rating will be. In most cases, the rating is also lowered by one level for a lower level in the business model. The adjacent illustration provides an overview.

According to § 60 SolvV a. F. Under rating systems all methods, procedures, control and monitoring procedures and data acquisition and data processing systems were understood that support the assessment of counterparty risks and the quantification of default and loss estimates for debtors. Internal bank ratings are subject to approval by the banking supervisory authority as part of the IRB approach ( Internal Ratings Based Approach ) according to Art. 143 Capital Adequacy Ordinance; otherwise, the ratings of recognized rating agencies are to be used. With the IRB approach, credit institutions must use a rating system that meets the requirements of Art. 144 ff. Capital Adequacy Ordinance. According to this, the institute's rating systems provide a meaningful assessment of the characteristics of the debtor and the transaction, a meaningful risk differentiation as well as precise and uniform quantitative risk estimates. According to Art. 170 Capital Adequacy Ordinance, credit institutions must maintain different rating systems for companies, credit institutions or states that take into account the risk characteristics of these debtors and contain at least 7 rating levels (notches) for debtors who have not defaulted and one for debtors in default.

Evaluation criteria

In order to assess and classify the debtor or issue to be rated, the rating agencies and banks collect all published data about the rating object, contact the debtor for additional information and evaluate this data internally. There are two types, quantitative and qualitative factors.

Quantitative factors

Evaluation of the economic situation (in the case of companies, among other things, liquidity , financial position , earnings position , balance sheet development , capital structure , susceptibility to currency and financial crises ) of the rated object on the basis of economic key figures such as profit , debt ratio , cash flow and degree of liquidity . In particular, debt ratios play a major role, as they reflect the risk coverage potential and debt service capacity as a central factor of a rating. In the case of states, the state budget is analyzed; in the case of state subdivisions, a municipal year-end analysis is carried out.

Qualitative factors

Under the qualitative factors features fall as management quality , corporate strategy , organizational structure , process organization , training of staff, construction of the controlling and risk management , and public relations as well as the competitiveness . In the case of states, the stability of the government , the legal and financial system or membership in international organizations are taken into account.

Experience and environmental factors

This includes, on the one hand, the entire history that a bank has logged with a customer, for example (were contracts adhered to, interest and repayment payments were made on time) and, on the other hand, external factors such as industry development, location conditions , supplier and customer relationships.

Rating of European countries by Standard & Poor.'s (as of June 27, 2016):
  • AAA
  • AA
  • A.
  • BBB
  • BB
  • B.
  • CCC
  • CC
  • no information
  • The higher the CDS - spreads , the worse, as here shown by the example of some European countries (2 February 2015), the rating

    Rating symbols / rating codes

    The rating classes - called “rating levels” in the Capital Adequacy Ordinance (CRR) - are each identified by rating symbols (rating codes). It is a letter key used by rating agencies that represents the default risk of a debtor and thus allows a simple assessment of creditworthiness . The rating code is the result of the rating process. An individual definition is assigned to each rating symbol. S&P defines the top grade AAA ( Triple A ) as "the highest rating given by S&P, whereby the ability to repay interest and loan amount is classified as extremely high." For every "notch", this definition deteriorates up to "D" as bad debts (“default”) or as default in payment when due , taking into account a grace period of 5 business days. Credit institutions use very different symbols for their internal bank ratings, which also aim to be able to distinguish the individual rating levels from one another. According to Art. 142 No. 6 CRR, you are obliged to assign empirically determined default probabilities to the individual rating classes . When a bad debt loss ("default") is considered to have occurred is defined in Art. 178 CCR.

    For ratings, a distinction is made between long-term ( long term ,> 360 days) and short-term ( short term , <360 days) ratings. For long term ratings, the rating codes are divided into AAA, AA, A, BBB, BB, B, CCC, CC, C and D. Within the letter combinations AA to B, a further, refined, subdivision into upper, middle and lower third is made. Different letter combinations are used depending on the rating agency. A “AAA” (triple A) rated bond is classified as very safe by the rating agencies, so the risk of default should be low. The default risk of bonds rated “Ca” or “CC” is rated as high. Since investors charge a premium for assuming the counterparty risk, the yields on bonds with a high credit rating are usually lower than those on poorly rated bonds. Debtors who are in arrears are rated “C” by Moody's and “D” by Standard & Poor's and Fitch. Such speculative bonds are more interesting for professional investors if they hope for a turnaround or an unexpectedly positive development.

    In the financial sector, ratings are divided into the groups investment grade (English investment grade , rating codes AAA to BBB including Baa3 or BBB-) and speculative (English speculative grade , rating code BB or worse). This distinction is particularly important for institutional investors such as pension funds or insurance companies , as they are often required by law or their own statutes to only buy bonds from debtors who have a certain minimum rating.

    Rating scales

    Different scales are used for the ratings. The following table gives an overview of the scales of the leading agencies using recognized comparison tables:

    Moody's S&P Fitch DBRS English
    Aaa P-1 AAA A-1 + AAA F1 + AAA R-1 (high) Prime (Triple A) Debtors with the highest creditworthiness, risk of default also in the long term virtually negligible
    Aa1 AA + AA + AAhigh R-1 (middle) High grade Safe investment, failure risk as good as negligible, but somewhat more difficult to assess in the long term
    Aa2 AA AA AA
    Aa3 AA- AA- AAlow
    A1 A + A-1 A + F1 Ahigh R-1 (low) Upper medium grade Safe investment, provided no unforeseen events affect the overall economy or the industry
    A2 A. A. A.
    A3 P-2 A- A-2 A- F2 Alow R-2 (high)
    Baa1 BBB + BBB + BBBhigh R-2 (middle) Lower medium grade Average investment. Problems are to be expected if the economy as a whole deteriorates
    Baa2 P-3 BBB A-3 BBB F3 BBB R-2 (low)
    Baa3 BBB- BBB- BBBlow R-3
    Ba1 Not Prime BB + B. BB + B. BBhigh R-4 Non-investment grade
    Speculative investment. If the situation worsens, failures are to be expected
    Ba2 BB BB BB
    Ba3 BB- BB- BBlow
    B1 B + B + Bhigh R-5 Highly speculative Highly speculative investment. If the situation worsens, failures are likely
    B2 B. B. B.
    B3 B- B- Blow
    Caa1 CCC + C. CCC C. CCC D. Substantial risks No failures are to be expected only if the development is favorable
    Caa2 CCC CC CC Extremely speculative
    Caa3 CCC- In default with little
    prospect for recovery
    Moody's: in arrears
    Standard & Poor's: high probability of default or insolvency proceedings applied for, but not in arrears yet
    Approx CC C. C.
    C. SD / RD / D. / Selective / Restricted default Partial, limited or total payment default
    D. D. In default

    Rating scales are tables with graduated probabilities of default that lie between the extreme values ​​“almost no risk” and “payment default”. A certain probability of default is assigned to the individual rating levels (“notches”). The higher the probability that a borrower can no longer meet his payment obligations in whole or in part, the worse his risk class (risk level) will be. The rating system includes a risk rating scale for debtors that only records the level of the debtor default risk. This scale includes at least 7 rating levels for debtors not in default and one level for debtors in default.

    There are also the following other abbreviations:

    • EXP / e (expected) expected rating
    • NAV (not available) rating not yet available
    • NR (not rated) not rated
    • p (provisional) preliminary rating
    • R (regulatory supervision) debtor is under regulatory supervision
    • TWR (terminated without rating) issue that was due or redeemed that was not rated
    • Unsolicited (unsolicited) rating created without the initiation and cooperation of the issuer
    • WD / WR (withdrawn rating) withdrawn rating


    Ratings are the basis of risk management . They are used by the externally rated debtor to communicate with the agencies, who give him precise requirements for improving a rating. External ratings are suitable in public to influence the reputation of rated debtors or to bring about buying or selling decisions by private or institutional investors. Therefore, rating changes can also trigger price changes. The external rating is a reference to the debtor in loan agreements or bonds, which can contribute to changes in credit margins / credit spreads / interest rates . As a reference in credit and syndicated loan agreements , it can decide in the form of covenants on blank credit , additional collateral or loan termination . Internal bank ratings lead to the same effects. In addition, they influence the amount of the “risk-weighted assets” and thus the equity burden of a loan portfolio . If the ratings deteriorate in general, banks will have to back their loan portfolio with more equity. In the financial sector, ratings have become indispensable, not least because of the statutory rating obligation for credit institutions and the legal recognition of rating agencies. The rating tasks must be carried out responsibly in order to rule out consequential errors as in the past as far as possible.

    See also


    • Martin Bemmann (2007): Development and validation of a stochastic simulation model for forecasting corporate insolvencies, TUDpress.
    • Uwe Blaurock (2007): Responsibility of Rating Agencies - Control by Private or Regulatory Law? , ZGR 2007, pp. 603-653
    • Fabian Dittrich: The Credit Rating Industry. Competition and Regulation . Dissertation, University of Cologne 2007 ( full text )
    • Ottmar Schneck, Paul Morgenthaler, Mohammed Yesilhark: Rating: how to prepare efficiently for Basel II. dtv, Munich 2003, ISBN 3-423-50871-X .
    • Oliver Everling, Ottmar Schneck: The ABC rating . Wiesbaden 2005, ISBN 3-527-50126-6 .
    • Robert Bölke: Fund ratings . WiKu-Wissenschaftsverlag, Duisburg 2006, ISBN 3-86553-169-5 .
    • Ann K. Achleitner, Oliver Everling: Fund rating: Quality measurement on the test bench - procedures, criteria and benefits. Gabler-Verlag, Wiesbaden 2003, ISBN 3-409-15012-9 .

    Web links

    Wiktionary: Rating  - explanations of meanings, word origins, synonyms, translations
    Wiktionary: AAA  - explanations of meanings, word origins, synonyms, translations

    Individual evidence

    1. Michael Munsch / Bernd Weiß: Rating: Financial services and decision support. 2001, p. 11.
    2. Creditworthiness analysis by the Deutsche Bundesbank
    3. ^ Henry Varnum Poor, History of the Railroads and Canals of the United States , Volume I, 1860.
    4. Gianluca Mattarocci, The Independence of Credit Rating Agencies , 2014, p. 33.
    5. Thomas E. Krayenbuehl, Cross-border Exposures and Country Risk , 2001, p. 108.
    6. Gunter Löffler: An anatomy of rating through the cycle , in: Journal of Banking and Finance 28, 2004, p. 695.
    7. Oliver Everling: Article "Rating" in: Wolfgang Gerke, Gerke Börsen Lexikon , 2002, p. 655 ff.
    8. ^ Volker G. Heinke: Credit Risk and Credit Rating of Fixed Income Securities. An empirical study on the euro market . 1998, p. 18 .
    9. Highlights of Economic Policy - Monthly Report of the BMWi December 2010: “Powerful Consultants” ( Memento of the original from May 18, 2015 in the Internet Archive ) Info: The archive link was inserted automatically and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. @1@ 2Template: Webachiv / IABot / www.bmwi.de
    10. Regulation (EC) No. 1060/2009 of the European Parliament of September 16, 2009, Official Journal EU L 302/1
    11. Ulrich G. Schroeter: Ratings - Credit assessments by third parties in the system of financial market, corporate and contract law. 2014, p. 779 ff.
    12. cf. In re Lehman Brothers Mortgage-Backed Securities Litigation of May 11, 2011, 650 F3d, 167, 183: “ The rating issued by a Rating Agency speaks merely to the Agency's opinion of the creditworthiness of a particular security.
    13. Ulrich G. Schroeter: Ratings - Credit assessments by third parties in the system of financial market, corporate and contract law. 2014, p. 20.
    14. Carsten Thomas Ebenroth, Thomas Daum: The legal aspects of the rating of issuers and issues. in: WM special supplement 5/1992 of October 24, 1992, p. 11.
    15. ^ S&P Ratings Services, Corporate Ratings Methodology. 04/14, 2014, p. 2.
    16. BBP Betriebswirtschaft in focus, banking associations refuse to disclose rating methods. Edition 10/2003, p. 270.
    17. Peter Seppelfricke : company analyzes . Schäffer-Poeschel, 2019, ISBN 978-3-7910-4435-4 ( schaeffer-poeschel.de [accessed January 7, 2020]).
    18. Standard & Poor's Ratings Definitions of November 20, 2014
    19. See e.g. Swiss Financial Market Authority , concordance tables , accessed on November 12, 2014.
    20. ^ Moody's, Rating Symbols & Definitions , accessed November 12, 2014
    21. ^ S&P Global Ratings Definitions. In: standardandpoors.com. September 18, 2019, accessed February 28, 2020 (American English).
    22. ^ Fitch Ratings, Definitions of Ratings and Other Forms of Opinion , accessed November 12, 2014.
    23. Credit ratings on morganstanley.com, accessed March 27, 2018.