Understand risk classification and investment grade – 06/15/2023 – Market

The risk rating agency S&P Global Ratings improved Brazil’s long-term outlook from “stable” to “positive” this Wednesday (14), but maintained the long- and short-term sovereign credit rating, currently at B in the local currency. .

The last time S&P Global changed the long-term outlook for Brazil to positive was in December 2019. As of April 2020, the country’s outlook was stable.

The government of Luiz Inácio Lula da Silva (PT) celebrated the announcement, but the country is still far from recovering the so-called investment grade. The country’s current grade, B, is still considered speculative grade. Above there is BB (also speculative) and BBB, when it is already considered investment grade. Brazil is, therefore, two steps away from obtaining investment grade.

Understand what risk ratings are and what investment grade is

Investment grade is a condition assigned by international risk rating agencies to securities, companies or countries to define that it is a safe investment — that is, with low risk of default.

The three most visible risk agencies in the world are Standard & Poor’s, Moody’s and Fitch Ratings.

Credit ratings have an impact on the cost of debt for companies and countries. The better the classification, the lower the disbursement with interest on financing tends to be, and vice versa.

For foreign investors, the evaluation of the agencies serves as a thermometer to know if the remuneration of a security is adequate to the risk of the investment.

Credit ratings are also important for funds: many of them are barred from investing in non-investment grade securities. If a debt issuer (country or company) is downgraded, these funds are forced to remove speculative-grade bonds from the portfolio.

Risk assessment companies are hired to do this analysis, which is an opinion.

Despite this, they argue that, even when assigned by order of financial agents, the risk score is an independent and reliable assessment because there is concern with the credibility of the agency itself.

It is worth mentioning, however, that, in the crash of the American real estate market that was at the epicenter of the global crisis triggered in 2008, securities in the sector that proved to be “bad assets” had the maximum score from the risk rating agencies with investment grade.

The notes issued are expressed in the form of letters and arithmetic signs. See below: