Credit ratings and leverage ratios
By SuperdayReps · Michigan Ross Undergrad | Wharton MBA · ex-Citi | ex-Greenhill · Former Head Mentor at a Leading IB Prep Service
6 min read · updated July 8, 2026
When a company borrows money, a lender has one question above all others: will I get paid back? A credit rating is a shorthand answer to that question. It is a letter grade, handed out by an independent agency, that scores how likely a borrower is to repay its debt on time and in full. The higher the grade, the safer the borrower looks, and the cheaper it can borrow.
Three agencies dominate: S&P, Moody's, and Fitch. They each rate the same borrower on their own scale, though the scales line up almost one to one. S&P and Fitch use letters like AAA and BBB. Moody's uses a slightly different notation like Aaa and Baa. When bankers talk about a company's rating, they usually mean the grade from one or more of these three.
The rating scale, top to bottom
The scale runs from the safest borrowers at the top down to companies already in default at the bottom. The categories below use S&P and Fitch notation on the left and the matching Moody's notation in the middle. The right column marks the two zones every banker cares about, investment grade and high yield.
| S&P / Fitch | Moody's | Zone |
|---|---|---|
| AAA | Aaa | Investment grade |
| AA | Aa | Investment grade |
| A | A | Investment grade |
| BBB | Baa | Investment grade |
| BB | Ba | High yield |
| B | B | High yield |
| CCC | Caa | High yield |
| CC to C | Ca to C | High yield |
| D | D | Default |
Within each letter band the agencies add a plus or minus (or a number for Moody's) to fine-tune the grade, so you get AA+, AA, AA-, and so on. A D, or a C on the Moody's scale, means the borrower has already missed payments.
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Frequently asked
- What is a credit rating?
- A credit rating is a letter grade from an independent agency that scores how likely a borrower is to repay its debt on time and in full. The three main agencies are S&P, Moody's, and Fitch. A higher grade means a safer borrower, which lets the company borrow at a cheaper rate.
- What is the difference between investment grade and high yield?
- The cutoff is BBB-/Baa3. At or above that line a borrower is investment grade and considered reasonably safe. One notch lower, at BB+/Ba1 and down, it is high yield, also called junk. The step matters because many large investors like pension funds can only hold investment grade, so falling below shrinks the buyer pool.
- What is the difference between leverage and coverage ratios?
- Leverage is total debt divided by EBITDA and measures how big the debt pile is. Coverage is EBITDA divided by interest and measures whether current earnings can service that debt. They answer different questions, so a company can look fine on one and dangerous on the other. Both drive the rating.
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