Standard and Poor's rating scale
The standard and poor rating system involves a scale composed of letters. The sequence of the scale starts at AAA which is the highest and ends at R which is the lowest. The full scale from highest to lowest rating is as follows: AAA, AA, A, BBB, BB, B, CCC, R. A rating of "AAA" means that a company has a very large probability of honoring all of its financial obligations and to maintain them over a large duration of time. An AAA rated company thus represents total financial security in both theory and practice.
A companies claims-paying ability can be classified based on its Standard and poor rating which are divided into two different classifications. Any company which has a rating from 'AAA' to 'BBB' can be considered to be "secure". This also serves to tell financial insurers that a company has a great financial capacity to meet policyholder obligations. It is seen on balance as sound. Any company with a classification ranging from 'BB' to 'CCC' are regarded as "vulnerable" and serves to tell insurers that a company does not have enough financial capacity to meet policyholders obligations. They are seen as unstable and as being in a poor economic condition.
Both plus and minus signs represent a company's standing within a category contrary to common thought that they indicate potential future rating changes. Certain company's ratings will sometimes also consist of a subscript of the letter 'q'. This represents the fact that the company's rating is based on quantitative analysis from any financial data made publically available. With regards to ratings related to claims-paying ability, this is mandatory financial data that must be filed with the National Association of Insurance Commissioners. The q subscript is not included in the Annuity & Life Insurance Shopper rating.
Long-Term Credit Ratings
Standard and Poor (S and P) scales rank companies on a scale ranging anywhere from AAA (the best) to D (being the worst). There are also rankings that occur between levels. For example, between AA and B a company can receive a rating of BBB+, BBB and BBB-. For some companies, Standard and poor rating system may also offer its help through giving on its opinion as to whether or not a company is likely to be downgraded (a minus sign) upgraded (a plus sign) or uncertain (neutral). This is known as a credit watch.
Short-Term Issue Credit Ratings
Standard and Poor also rates specific issues occurring within a company on a scale ranging from A-1 to D. Furthermore, once in the A-1 category a company can be given a plus sign. This is a reliable sign that the issuer's is in an excellent financial position to meet any financial obligations. When factoring a companies credit analysis and issue rating both country risk and the currency with which the obliged individual will pay back with are taken into consideration.
| Long-Term Credit Ratings | |
| AAA | the best quality companies, reliable and stable |
| AA | quality companies, a bit higher risk than AAA |
| A | economic situation can affect finance |
| BBB | medium class companies, which are satisfactory at the moment |
| BB | more prone to changes in the economy |
| B | financial situation varies noticeably |
| CCC | currently vulnerable and dependent on favorable economic conditions to meet its commitments |
| CC | highly vulnerable, very speculative bonds |
| C | highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations |
| CI | past due on interest |
| R | under regulatory supervision due to its financial situation |
| SD | has selectively defaulted on some obligations |
| D | has defaulted on obligations and S&P believes that it will generally default on most or all obligations |
| NR | not rated |
| Short-Term Issue Credit Ratings | |
| A-1 | obligor's capacity to meet its financial commitment on the obligation is strong |
| A-2 | is susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory |
| A-3 | adverse economic conditions are likely to weaken the obligor's capacity to meet its financial commitment on the obligation |
| B | has a significant speculative characteristics. The obligor currently has the capacity to meet its financial obligation but faces major ongoing uncertainties that could impacts its financial commitment on the obligation |
| C | currently vulnerable to nonpayment and is dependent upon favourable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation |
| D | is in payment default. Obligation not made on due date and grace period may not have expired. The rating is also used upon the filing of a bankruptcy petition. |
S&P Fair Value Rank
Using Standard and Poor's specific quantitative model, stocks can be placed in one of five different groups starting with group 5 which includes the most undervalued stocks going all the way up to Group one which includes the most overvalued stocks. As undervalued stocks, any group 5 stock is expected to be more profitable than anything else. In addition to the rankings, a positive (+) or negative (-) sign known as a timing index can sometimes be added onto the Fair Value rating in order to ease the selecting of stocks. A stock with a positive sign attached to the Fair Value Rank indicated that it has an even better chance to be more profitable than another stock categorized within the same group. Conversely, a stock with a negative sign attached to it is projected to be less profitable than a stock in a similar fair value group ranking. Fair Value rankings, measured according to groups 5 to 1 can be interpreted as follows:
Group 5 - The stock is extremely underrated/undervalued
Group 4- The Stock is somewhat underrated/undervalued
Group 3- The stock is valued appropriately
Group 2 - The Stock is somewhat overrated/overvalued
Group 1 - The Stock is extremely overrated/overvalued
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