Credit rating is still an integral part of the financial landscape, despite the subprime fire that the industry helped to fan. Fifteen years and far-reaching reforms later, it remains the main yardstick of an issuer's financial soundness. But what exactly are we talking about? It is no more and no less than a synthetic measure of the risk a borrower represents for a creditor. A bit like a bank's verdict on a home loan application: if the applicant meets the criteria, he'll get his money. Above all, they will pay more or less, depending on the degree of security they offer.

Specialized agencies have set up complex criteria to determine the degree of creditworthiness of an issuer, be it a company, a community or a country. To simplify reading, a system of codes has been created. Let's take a look at the scale developed by the best-known agency, Standard & Poor's. The table below summarizes the main characteristics of each rating category. The other agencies, Moody's and Fitch in particular, use a slightly different system, but the main features are the same. Overall, the higher an issuer is on the table, the less it will pay for its money. The further down the scale, the higher the cost of debt. If an issuer is too low, it even runs the risk of no longer being able to find financing, even at a high price.

The ABCs

The rating most often used in the media is that of long-term issuer, but there are several others, always correlated with each other. To refine the classification between issuers, the agencies also use "+" and "-" ratings, starting with "AA". Thus, an issuer rated "AA+" will be very close to the top category, "AAA". It will, however, be better rated than an "AA", let alone an "AA-" or a "BBB+". Are you still following?

In addition to this issuer rating, the agencies give a trend for medium-term financial strength. The rating outlook is thus "positive" (likely to rise in the medium term), "stable" (likely to remain unchanged) or "negative" (likely to fall in the long term). When major events occur in the life of an issuer or its sector, the agency also has the option of placing the rating "under watch", which implies that it is likely to move in the short term.

Rating scales by agency (source: European Capital Markets Institute)

AAA" ratings are no longer commonplace

Let's stay with S&P and look at the so-called sovereign ratings. These are the ratings assigned to governments. They are of major importance, as they are one of the determinants of a country's borrowing costs. If you're Australia's budget minister, your "AAA" rating will give you access to very attractive rates for issuing debt. More attractive, in any case, than those available to your counterpart in El Salvador with his "CCC+". Sovereign ratings also condition many other categories of borrowing, such as those of government-related agencies or certain public companies. As of May 24, 2023, S&P rates 11 countries "AAA" (Australia, Canada, Denmark, Germany, Netherlands, Sweden, Norway, Singapore, Switzerland, Liechtenstein and Luxembourg). Moody's has 12 (the same as S&P, plus New Zealand and the USA, minus Liechtenstein, not tracked). Fitch also has 10 (the same as S&P, plus the USA, minus Liechtenstein and Canada, which recently lost its grade). Fitch recently downgraded France to "AA-", citing the political and social context, which could lead to complications with public spending cuts.

For companies, the principle is much the same: the better a company's rating, the more attractive its borrowing conditions, according to the old principle that you only lend to the rich. Among non-financial companies, S&P lists only two "AAA" companies: Johnson & Johnson and Microsoft. Four companies are positioned on the rung below with an "AA+": Alphabet, Apple, Singapore Tech Engineering and MTR Corporation.

As far as Swiss companies are concerned, the best rating goes to Roche Holding with its "AA". Nestlé and Novartis are not far behind with "AA-". Finally, Compagnie Financière Richemont, analyzed here, Geberit and Flughafen Zurich have an "A+", while Swisscom is rated "A".

In Belgium, only postal service provider Bpost is graced with the first letter of the alphabet, with an "A". In Canada, Imperial Oil, the oil company, has the highest rating, with an "AA-".

In France, the top ratings go to L'Oréal and Sanofi with "AA", closely followed by LVMH with "AA-". TotalEnergies completes the quartet of good performers with a robust "A+". Six French companies also score a solid "A": Air Liquide, Kering( analyzed here), ADP, pareil, Airbus, EssilorLuxottica and Dassault Systèmes.

  • In the UK:

"AA-: The Mercantile Investment Trust

"A+": Shell and Unilever, analyzed here.

"A": Associated British Foods, AstraZeneca, Rio Tinto, GSK and Compass Group

  • In Germany:

"A+": Siemens AG

"A": Merck KGaa, Henkel AG, Mercedes-Benz Group, BASF, SAP, Knorr-Bremse, BMW

  • In Sweden:

"A+": Atlas Copco

"A": Volvo, analyzed here

  • South Korea:

"AA": Korea Electric Power and Korea Gas Corporation

"AA-": Samsung

  • In Taiwan:

"AA": Chunghwa Telecom

"AA-": Taiwan Semiconductor

  • In Japan:

40 companies have a rating above "A", including: Toyota Industries Corp, Fujifilm, Toyota Motor, Ajinomoto and Mitsubishi Estate.