But what do credit ratings really mean?

In some media reports in New Zealand last week the 'BB' long-term rating assigned to PGG Wrightson Finance was referred to as a "pass" mark.

What was meant by these comments was that the company had achieved the minimum rating required to qualify for a deposit guarantee from the New Zealand government, after October this year.

However, it underlines the confusion that exists, particularly in retail markets, about what designated credit ratings actually mean.

To illustrate the point, the 'B+' long-term credit rating assigned to Manchester Unity Credit Union is not a good rating because B+ comes after A-: just like it used to at school.

The ratings agencies use a somewhat arcane rating scale to signify increasing levels of credit risk or to be precise, default risk. The double B and single B rating categories come after the triple B rating category - the latter is the last considered to be investment grade. The double B and single B categories belong to the range of rating categories considered to be sub-investment grade: grades such as these are among the ratings assigned to junk bonds in the US.
 
So what does this really mean? According to S&P's 2008 Annual Global Default Study, a company that is rated 'BBB' today has a 2.43 per cent probability of defaulting at some point over the next five years. For a company that is rated 'BB' the probability increases to 9.07 per cent and in the 'B' rating category this risk jumps to 20.58 per cent.

In other words, for money deposited with or lent to a company rated 'B' today, there is a greater than 20 per cent chance that the company will fail to make an interest payment over the next five years and/or repay the principal in full, at the end of that period.