Notes for Level I CFA® Program

R55 Fundamentals of Credit Analysis

4.2. Issuer vs. Issue RatingsWatch Video Play


Rating agencies provide two ratings:

  • Issuer rating: This is based on the creditworthiness of the issuer. It applies to senior unsecured debt. Also known as corporate family rating (CFR).
  • Issue rating: This rating is assigned to a specific debt/financial obligation. It takes into consideration the seniority ranking of the debt within the capital structure. Also known as corporate credit rating (CCR).

Cross-default provision: It is believed that the probability of default on one issue is linked to other issues of the same issuer. That is, a default on one issue triggers default on other issues with the same default probability.

Notching: A rating methodology to distinguish rating between different liabilities (bond issues) of an issuer. The objective is that two securities with the same rating should have the same expected loss rate (probability of default * expected severity loss). Credit rating on issues can be moved up or down by a notch based on the risk of default/severity loss.

Factors the rating agencies consider while assigning ratings (notching up/down):

  • Probability of default: it is the primary factor that drives the rating.
  • Priority of payment: who gets paid first in the event of a default: secured/senior unsecured/subordinated?
  • Structural subordination: this is when the issuer is a holding company rather than an operating company. Assume both the holding company and each of its operating subsidiaries has issued bonds. The debt of the subsidiaries gets serviced by its cash flows and assets first before any of it can be passed to the holding company. All else equal debt issued by the holding company will have a lower rating than the debt issued by the subsidiary.