Standard & Poor's (S&P) is a business intelligence firm that is part of the S&P Global corporation. Its mission is to do high-quality credit risk analysis on public and private company debt, including government debt.
Definition and Example of Standard & Poor's
"Standard" and "Poor" are the names of two financial firms that combined in 1941. Standard & Poor's specializes in credit ratings for bonds, countries, and other investments, but that's just one of S&P Global's tens of thousands of financial market services. The organization employs extensive data resources to provide customized analyses and market indices. Acronym: S&P S&P Global's most well-known index is the S&P 500, a stock market index that measures the top publicly traded firms in the United States, accounting for around 70% to 80% of the overall market capitalization.Origins of Standard & Poor's
Ironically, a corporation assessing wealth is called "Poor's," yet the name comes from one of the company's founders, Henry Varnum Poor. In 1860, he released The History of Railroads and Canals in the United States. The book focused on the scarcity of good information for investors. His work sowed the seeds of corporate transparency, which evolved into a sophisticated corporate and national credit rating system over the next 160 years.How Standard & Poor's (S&P) Works
The S&P rating is a credit score representing a company's, city's, or country's overall creditworthiness regarding debt. Standard & Poor assigns a score on the likelihood that the business will repay the debt in question. The ratings are for informative purposes only; they do not constitute investment advice or forecast the likelihood of default. S&P. also gives individual bonds a credit rating. There are various distinct types of bonds, each with a particular risk-to-reward ratio. You can use S&P ratings to help you decide whether or not to buy a bond.They'll also provide you with an idea of how a country's economy is performing, which can assist you in making decisions about other investments such as currencies or foreign equities.How S&P Creates the Ratings
S&P analysts create the ratings. They receive their information from reports such as annual reports, press releases, and news items that have been published. They also conduct interviews with the company's management. Using these resources, analysts evaluate the company's financial state, operating performance, and policies. They establish an opinion on the company's risk-management practices, most importantly. Standard & Poor's used to charge a monthly subscription fee to access its credit reports. It modified its income structure in 1968, charging the companies it rated rather than the investors who used the ratings. S&P stated in a congressional hearing in 2002 that it has altered its revenue structure to handle rising expenses and increased demand for credit ratings. However, critics have questioned the company's capacity to analyze its paying customers effectively.How the Rating Scale Works
A letter grade is assigned to an S&P credit rating. The best rating is "AAA," which indicates that the borrower is quite likely to repay its obligation. The worst is "D," which indicates that the issuer has defaulted. To demonstrate strength, Standard & Poor utilizes numerous letters (occasionally followed by pluses or minuses). Despite the fact that Standard & Poor's only utilizes four different letters, there are 17 ratings in all. The corporation may increase the number of letters by doubling or tripling them—the more, the better. A plus sign (preferable to single letters) or a minus sign can also be used in ratings (worse than standalone letters). One of the three major credit rating organizations in the United States is S&P. All three use comparable rating systems, albeit there are minor changes in how those evaluations are communicated. For example, S&P's "BBB+" rating is comparable to Moody's "Baa1" rating.Types of Standard & Poor's Ratings
Many entities that sell debt have their creditworthiness rated by Standard & Poor.Bond Ratings
According to S&P, a bond with a high letter grade can pay a lower interest rate than one with a lower grade since it is less risky. Investors will accept lower returns in exchange for a relatively safe investment. Companies, towns, and countries strive to maintain a high letter grade to save money by issuing low-interest bonds. "Investment-grade" bonds are the safest ones. Speculative grades are those with a letter grade of BB+ or lower. They're also known as "junk" bonds or "high-yield" bonds. These businesses must pay higher interest rates to compensate for the additional risk. The details for long-term bonds are listed in the table below. Some investors prefer junk bonds because they can make more money if the issuer does not default.Rating Scale for Long-Term Bonds
The following chart provides further detail on what each letter grade means for the issuing entity.| Letter Grade | Grade | Capacity to Repay |
| AAA | Investment | Extremely strong |
| AA+, AA, AA- | Investment | Very strong |
| A+, A, A- | Investment | Strong |
| BBB+, BBB, BBB- | Investment | Adequate |
| BB+, BB | Speculative | Faces major future uncertainties |
| B | Speculative | Faces major uncertainties |
| CCC | Speculative | Currently vulnerable |
| CC | Speculative | Currently highly vulnerable |
| C | Speculative | Has filed bankruptcy petition |
| D | Speculative | In default |
Country Ratings
S&P. publishes ratings for 130 countries. The company evaluates the chances of a country defaulting on its sovereign debt. Institutional, economic, external, internal, and monetary assessment are the five aspects of evaluation. The country's institutional and economic profile is created by combining institutional and economic assessments. The remaining three assessment areas are merged to construct a flexibility and performance profile. These profiles are based on an examination of factors such as:- Whether the country's government is stable and maintains long-term fiscal policies.
- The country's economic strength and potential for growth
- Direct foreign investment (FDI)
- Whether the central bank is independent of the government and follows sound monetary policy.
Notable Happenings
Some opponents attribute the 2008 financial crisis to the S&P and other rating organizations. S&P provided AAA ratings to mortgage-backed securities as recently as 2006, but 83 percent of those assets were suddenly lowered in 2007, as the housing market began to fall apart. Some critics have speculated that S&P was hesitant to award a poor grade to its paying customers. Decades of finance industry deregulation, according to a congressional investigation, worsened these dangerous conditions. Governments increased expenditures to bolster the economy as the recession deteriorated. As a result, S&P downgraded the US Treasury debt from AAA to AA+ in 2011. S&P was concerned that Congress and President Obama failed to develop a viable debt-reduction strategy. The Dow Jones Industrial Average plummeted in August 2011 due to the credit rating. Many observers observed the irony of the US rating. By assigning excellent ratings to mortgage-backed securities that defaulted, S&P may have contributed to the recession. The government was then punished for the debt incurred due to the same recession.Key Takeaways
- Standard & Poor's (S&P) is a business intelligence firm that is part of the S&P Global corporation.
- S&P is a credit rating agency that focuses on bonds, countries, and other investments.
- S&P derives its ratings from publicly available publications such as annual reports, press announcements, and news stories.
- The S&P and other rating organizations may have contributed to the 2008 financial crisis by instilling excessive faith in mortgage-backed securities.
