Everything You Need to Know About a Credit Rating Scale

Credit ratings can be used to evaluate the risk of partnering with a business. But what do they indicate? How do you interpret them based on the credit rating scale? What do they suggest about businesses providing human capital management (HCM) products and services? We'll discuss that and more.

Credit ratings are used by lenders, investors, suppliers and vendors to evaluate the risk of extending credit to or partnering with a business.
Partnering with an HCM provider with a strong credit rating is crucial. It indicates a lower risk of financial instability, which is important for the safety and security of your payroll and tax payments.
Credit ratings are calculated by three major agencies in the U.S.: Standard & Poor (S&P), Fitch and Moody's.

What is a credit rating?

A credit rating reflects a company's financial stability and reliability. Lenders and investors use these ratings to evaluate the risk of giving businesses financial credit. The ratings tell lenders how likely companies are to repay their debts on time and, therefore, how worthy the businesses are of receiving credit. Anyone with access — including individuals, businesses, investors, suppliers and vendors — may use the ratings to evaluate companies' financial health and decide if a partnership is worthwhile.

How are credit ratings calculated?

The three major credit ratings agencies, Standard & Poor's Global Ratings, Fitch Ratings and Moody's Investors Service, use a wide range of quantitative and qualitative metrics to calculate credit ratings. The specific factors vary between the three. The agencies may evaluate competitiveness, business scale, business profile, business risk, profitability, leverage, diversification, capital structure, financial policy and liquidity.

"It's basically to a large extent, 'What's your scale? Do you have revenue in the United States or internationally? Are you diversified? What is your competitive position? Are you a leader in your market? How aggressive are you about leverage?'" says Kristin Krieg, vice president, assistant treasurer at ADP.

How do you use a credit rating scale?

The three credit rating agencies use different yet similar credit rating scales. They're easy to understand if you're familiar with academic grading because they all use As, Bs, Cs and sometimes Ds.

This table shows the ratings from highest to lowest for the three main agencies.

Credit rating scales by agency

S&P	Fitch	Moody's	What it means
AAA	AAA	Aaa	Prime — extremely strong capacity to meet financial commitments and unlikely to be adversely affected by foreseeable events
AA+	AA+	Aa1	High grade — very strong capacity to meet financial commitments and not significantly vulnerable to foreseeable events
AA	AA	Aa2
AA-	AA-	Aa3
A+	A+	A1	Upper medium grade — strong capacity to meet financial commitments but somewhat susceptible to economic conditions and changes in circumstances
A	A	A2
A-	A-	A3
BBB+	BBB+	Baa1	Lower medium grade — adequate capacity to meet financial commitments but adverse business or economic conditions are more likely to impair them
BBB	BBB	Baa2
BBB-	BBB-	Baa3
BB+	BB+	Ba1	Non-investment grade — less vulnerable in the near term but faces major ongoing uncertainties to adverse business, financial and economic conditions
BB	BB	Ba2
BB-	BB-	Ba3
B+	B+	B1	Highly speculative — more vulnerable to adverse business, financial and economic conditions but currently can meet financial commitments
B	B	B2
B-	B-	B3
CCC+	CCC	Caa1	Substantial risk — currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments
CCC		Caa2	Extremely speculative — default is a real possibility
CCC-		Caa3	Highly vulnerable — default hasn't yet occurred but is expected practically as a certainty
CC	CC	Ca
C	C
D	RD / D	C	In default — payment default has happened on a financial commitment or breach of an imputed promise or a bankruptcy petition has been filed

Credit ratings are considered investment grade if they're BBB or above on the S&P and Fitch scales or Baa3 and above on Moody's scale. Investment grade refers to investing in bonds issued by a company. It means most institutional investors are permitted to own the company's bonds, but the bonds typically pay a lower interest rate due to their low risk.

Non-investment grade bonds, or speculative bonds, typically come from companies with questionable liquidity and solvency. It's essentially like saying, "Enter at your own risk." They might pay a higher interest rate, but there's a higher probability of default.

Despite the rating, it's important to remember that a good credit rating is not a guarantee. It's only the rating agency's assessment of the company's ability to meet its financial commitments. The company's investments and business partners still need to do their research and exercise caution.

How do companies get credit ratings?

Credit ratings are generally only available for public companies that have issued public or private debt. Companies initiate the rating process because they want to develop an investor base. It's usually something larger and more mature companies do.

The three credit rating agencies take slightly different approaches to developing credit ratings, but they all assess both bonds and companies as a whole. The rating is based on three areas:

Business risk profile. This looks at the company's operating risk and sustainability of profits, considering the industry in which the company operates, its competitive positioning, products, geography and customers. More diverse companies are generally considered less risky because if a specific event impacts one area of the business, other areas can continue operations.
Financial risk profile. Credit rating agencies examine a company's financial statements and calculate financial ratios to assess its financial position and ability to repay creditors in the long term.
Supplementary risks. These risks can include the company's financial policies, governance and structure. Credit rating agencies also consider the company's ability to get support from a parent company or the government.

Where do you find credit ratings?

Credit ratings are typically public information that's readily available online. They're often publicized when they're attached to bonds or mentioned in press releases.

If you want a specific rating, Google the company's name and credit rating. You'll often see ratings from the Big 3 credit rating agencies listed at once, like this: (AA- / Aa3 / AA-).

However, Krieg notes, "If you want to dig deeper and see what's in the credit reports, that's harder. You can't get access to those without paying the credit rating agencies."

Remember that not all companies have credit ratings, just those with public or private debt.

Why should I care about my HCM provider's credit rating?

Companies should always be thoughtful about who they partner with. A strong credit profile means the HCM provider should have ample liquidity and prudent financial policies, which help ensure your payroll and tax payments are properly safeguarded.

If an HCM provider doesn't have a strong credit profile, you may want to insist that funds be held in a bankruptcy remote trust pending transfer to employees, tax authorities and other payees. This can help ensure the right people, including employees, get paid during a bankruptcy or business failure.

The bottom line: Ensure your HCM provider has a strong credit rating. Select a provider with a prudent approach to liquidity that has demonstrated its ability to consistently meet its financial obligations.

ADP's credit ratings

ADP maintains strong credit ratings. You can view them anytime in our corporate fact sheet. We also carry a bankruptcy remote trust pending transfer to client employees, tax authorities and other payees.

When you partner with ADP, you can rest assured we're committed to maintaining strong credit ratings. Our stability and reliability help us provide unmatched products and services while protecting your ability to pay your people.

Find out why clients trust ADP.