Standard and Poor's: The Company and Its Ratings

How Do S&P Ratings Protect You?

S&P Ratings
Use the S&P Ratings to help you with investment decisions. Photo: FangXiaNuo/Getty Images

Definition: Standard & Poor's is a business intelligence corporation. Its corporate name is S&P Global. It provides credit ratings on bonds, countries and other investments. S&P Global also calculates more than one million stock market indices. The most well-known is the S&P 500. The company provides customized analysis using its data. 

Standard and Poor are the names of the two financial companies that merged in 1941.

It's ironic that a company that measures wealth has the word "poor" in its title. That name came from one of the company's founders, Henry Varnum Poor. In 1860, he published the History of Railroads and Canals of the United States. Mr. Poor was concerned about the lack of quality information available to investors. His book began a campaign to publicize details of corporate operations. (Source: "Who We Are," S&P Global.)

Standard & Poor's Ratings

The S&P rating is a credit score that describes the general creditworthiness of a company, city or country that issues debt. The Standard and Poor's company rates how likely a debt will be repaid. The ratings are for information only. They aren't investment recommendations nor do they predict the probability of default. S&P also rates the creditworthiness of individual bonds. Here's more about the different types of bonds

You can use S&P ratings to help you decide whether to buy a bond.

It will also tell you how a country's economy is doing. That can help you in other investments like forex trades or foreign stocks. 

How S&P Creates the Ratings. S&P analysts create the ratings. They get information from published reports such as annual reports, press releases and news articles. They also interview the management of the company they are rating.

The analysts then assess the company’s financial condition, operating performance and policies. Most important, they form an opinion about the company's risk management strategies.

In the beginning, Standard & Poor's sold their reports to investors. S&P changed that policy when copy machines were invented. It worried that investors would copy the reports and distribute them to their friends. Instead, it started charging the companies it was rating.

Standard & Poor's has come under criticism for that change. Critics doubt that S&P can adequately evaluate its paying customers.

How the Ratings Scale Works. An S&P rating is a letter grade. The best is 'AAA'. That means it is highly likely that the borrower will repay its debt. The worst is 'D,' which means the issuer has already defaulted. 

Standard & Poor's uses multiple letters, and pluses or minuses, to indicate strength. That creates 17 ratings even though it only uses four letters. Three letters are better than two or one. Pluses are better than minuses. (Source: Standard & Poor's Ratings Definitions.)

Bond Ratings. A bond that receives a high letter grade can pay a lower interest rate than one with a lower grade. That's because it is not as risky.

It offers less return. Companies, cities and countries work hard to keep a high letter grade so they can get loans and pay that low-interest rate. 

The table below shows the specifics for long-term bonds. Letter grades of BB+ or lower are speculative. That means the company has to pay a lot more in interest to offset the increased risk. Some buyers like these "junk bonds" because they pay high interest.

                                                Ratings Scale for Long-Term Bonds

Letter Grade GradeCapacity to Repay
AAA InvestmentExtremely strong
AA+, AA, AA- InvestmentVery strong
A+, A, A- InvestmentStrong
BBB+, BBB, BBB-  InvestmentAdequate
BB+, BB Speculative Faces major future uncertainties 
B SpeculativeFaces major uncertainties
CCC SpeculativeCurrently vulnerable
CC SpeculativeCurrently highly vulnerable
C SpeculativeHas filed bankruptcy petition 
D SpeculativeIn default

                                      (Source: "About Credit Ratings," Standard & Poor's.)

S&P also offers ratings on short-term debt. That has a slightly different scale. S&P also provides outlook ratings for the next six months to two years.  Those are positivenegativestable or developing.

Country Ratings. S&P publishes ratings for 130 countries. The company analyzes how likely it is that a country will default on its sovereign debt. It bases this on its analysis of four factors. It looks at whether the country's government is stable and follows sustainable fiscal policies. It reviews the country's economic strength and its growth prospects. It takes a look at foreign direct investment. The analysts give an opinion on whether the nation's central bank is independent of its government and uses good monetary policy. (Source: "Global Sovereigns," S&P Global Ratings.)

S&P Ratings Role in the 2008 Financial Crisis. Critics blame the S&P and other rating agencies for the 2008 financial crisis. S&P rated mortgage-backed securities "Investment Grade" even though they held many tranches from subprime mortgages. The critics note that S&P was reluctant to give a low grade to its customers. For more, see What Caused the 2008 Financial Crisis?

In 2011, S&P downgraded U.S. Treasury debt from AAA to AA+. S&P was concerned that Congress and President Obama didn't put together a solid enough debt reduction plan. The credit downgrade sent the Dow plummeting in August 2011. 

Many analysts noted the irony. S&P helped cause the recession. It then punished the government for the debt created by that same recession.  The U.S. debt rose 40 percent thanks to recession-generated lower revenue and higher spending.

S&P 500

Standard & Poor's also publishes the S&P 500. It's a stock market index that tracks the 500 most widely held stocks ​on both the New York Stock Exchange and the NASDAQ.

Its goal is to represent the entire stock market. It does this by reflecting the risk and return of all large cap companies.