Ratings apply to issuers of fixed income securities and to the securities issues themselves. For fixed income issues, a credit rating is a forward-looking evaluation of the probability of default and severity of loss expressed in a standard measure. Ratings apply to bank loans, commercial paper, medium-term notes, bonds and preferred stock, but they are not used for common stock. By convention, an issuer rating is equal to a senior unsecured debt rating whether the company has any such debt outstanding or not. In effect, issuer ratings deal with default probability only.
Ratings use standard scales to rank risk.
The major rating grades are the basic measures of relative risk, and the subgrades show risk rankings within each grade. Within the broad categories of industrial companies and financial companies, the ratings scales apply equally to all types of issues and issuers. That is, a Mexican cement company bond and a French wireless telephone company bank loan with the same rating have essentially the same degree of risk. Just as a US insurance company and a Japanese bank with the same rating have essentially the same degree of risk. Ratings are forward looking.