Credit Ratings That Prove Useful
R&I assigns credit ratings as an opinion regarding an issuer’s general capacity to fulfill its financial obligations and the certainty of the fulfillment of its individual obligations as promised (creditworthiness). Credit ratings are a simple measure of the creditworthiness of rated entities, and their difference is shown by rating symbols such as “AAA”. Because of this simplicity, credit ratings are used widely when judging and analyzing credit risk, including evaluation of credit risk, spread-based judgment of whether bonds are priced expensively or cheaply, compliance with rating criteria pertaining to bond investments, and decisions on the timing for selling a rated instrument. A credit rating can be utilized even more effectively by reading materials such as the rating rationales described in the News Release, through which a rating action is made public, and the Rating Methodologies R&I uses to determine credit ratings.
Quality of R&I’s Credit Ratings
How can you know the quality of credit ratings, which are used for investment decisions? R&I aggregates the events where issuers to which R&I has assigned credit ratings have failed to perform their financial obligations (defaults), and publicly releases default rates by rating on an ongoing basis. (To see this information, click here.) Based on such data, you can see whether default rates are in line with the credit ratings R&I has assigned. For example, the figure below shows the average five-year cumulative default rate from FY1978 to FY2016 by rating. This suggests that a high R&I credit rating corresponds to a low default rate, and that the lower the level of the credit rating, the higher the default rate.
Average Five Year Cumulative Default Rates (Unit: %)
*The measurement period for calculating the average is FY1978-FY2016.
[Source:R&I Rating Transition Statistics]