BB credit rating definition
A credit rating for debt instruments in non-investment grade or low-quality investments
What is BB credit rating?
The BB credit rating means there is a higher probability for default of a debt issuer or a debt instrument. This is the grade issued by S&P and Fitch, while the respective grade from Moody’s is Ba2.
BB is the second-best non-investment grade. Such bonds fall within the category of junk bonds, high-yield bonds, or speculative instruments.
The investment grade is particularly important for some investors, such as certain funds, as they are only allowed to deal with investment-grade bonds.
Because of the higher risk involved in debt instruments rated BB or below, investors can expect a higher return. It is also usually more difficult for companies with a BB grade to raise capital when issuing a non-investment grade bond.
BB credit rating meaning
BB rating means that potential problems may arise from adverse changes in the market, business, or financial conditions. Although the grade shows the issuer is currently able to pay its financial obligations on time, this ability may deteriorate in the future.
The potential danger for investors holding BB grade bonds is that the credit rating can be decreased by the rating agencies if certain factors negatively affect the issuer’s financial position.
Accordingly, investors should constantly monitor the rating of the issue (corporation, municipality or government). Downgrades of the rating will lower the price of the bonds.
BB credit rating explained
Debt instruments with BB credit rating can provide a higher yield for investors and boost the average return of a portfolio. Sometimes high-yield bonds can be a better investment than buying stocks from the same issuer.
If bankruptcy occurs, bonds have priority over the stocks in the payout line. An adequate period for buying BB bonds is during economic expansion because it is less likely that default will occur.
The disadvantage of holding a BB-grade instrument is that you risk losing the entire amount invested. During economic downturns, these bonds are susceptible to substantial negative changes and issuers may not be able to meet their financial obligations on time.
Moreover, changes in interest rates can limit the ability for new bond issuance, which can obstruct the process of raising capital.