Losses vary according to the priority of the issue in default. As the chart indicates, senior types of debt lose much less value than subordinated types, and secured debt loses less than unsecured. For companies with an investment grade corporate rating, secured debt is rated one subgrade higher than unsecured debt, and subordinated debt is rated one subgrade lower. Ratings can be used as precise measures of the probability of default, not just as qualitative rankings of creditworthiness. Moody's Investors Service A default rate is the percentage of issues with a given rating at the start of the period going into default during the period.
Investors take ratings seriously.
Bond market pricing reflects the differences in risk measured by ratings. As the chart above illustrates, the lower the rating the higher the return required by the market to compensate for the increased risk. A rating starts with a business risk analysis. It identifies risk factors in the business environment and establishes the base level of risk for the financial analysis. It also helps to identify developments that might lead to an upgrade or a downgrade of the rating in the future.