What Is a "B" Credit Rating?

Corporations and other businesses must demonstrate their creditworthiness to potential lenders – and that's where credit rating agencies come in. Standard & Poor's (S&P), Moody's and Fitch assign ratings to governments and companies that issue bonds or other debt instruments. Each agency uses a different rating scale, which may include uppercase and lowercase letters or a combination of numbers and letters, such as Aa1, B2 or Caa3. But what does a B credit rating mean?

Private and public organizations receive different ratings based on their ability to pay off debt. Moody's, S&P Global Ratings (Standard & Poor's) and Fitch, the three major rating organizations, use rating scales and symbols to express credit risk. Their evaluations can provide valuable insights to lenders, investors and other third parties. Credit ratings may apply to the organization itself or its debt securities, such as treasury bonds.

The U.S. Securities and Exchange Commission (SEC) explains that credit ratings don't reflect market risks or other factors that may affect the value of a security. Moreover, they cannot guarantee that an organization will pay its investors. There may also be conflicts of interest between some credit rating agencies and the organizations they rate. For these reasons, it's important to do your own research and use good judgment when making investment decisions. Don't rely on credit ratings alone.

As mentioned earlier, each agency uses different methods to measure creditworthiness. Moody's uses a combination of numbers and letters, such as Aaa, Aa3, Ba2 and Ca. S&P, Fitch and DBRS Morningstar rate companies on a scale of A to D, with AAA being the highest grade. These ratings are subjective and can only estimate the level of credit risk, notes the SEC.

Companies with a Baa3/BBB- credit rating or higher are typically considered "investment grade," according to the Association of Corporate Treasurers. An organization rated Ba1/BB+/BB+ or below, on the other hand, is considered speculative and may have difficulty securing investment. Generally, "AAA" ratings indicate the lowest credit risk. The lower you go down the scale, the higher the credit risk. Currently, Johnson & Johnson and Microsoft are the only two AAA-rated companies in the world.

On Moody's credit rating scale, a B1, B2 or B3 would be a speculative or non-investment grade rating. The same goes for companies with a Caa, Ca or C rating. However, banks rated C may represent a viable option for potential investors, according to Moody's.

Organizations with a B credit rating on S&P's scale are considered speculative. A company that falls into this category is often more vulnerable to competition and economic threats than one with a higher rating, such as A or BB+. But even so, it may still be able to meet its financial obligations. Fitch assigns B ratings to companies with an uncertain financial future. These businesses are classified as non-investment grade and may not be able to meet their debt obligations over the next year.

Remember that credit ratings don't tell the whole story. As the SEC notes, many investors and security issuers pay credit rating agencies for their ratings. Given these aspects, it's in your best interest to do some legwork before making investments. Learn about the different types of bonds, study the financial market and research the companies you're interested in. Credit ratings can help you assess the level of risk, but there are several other factors you need to take into account.