Factors Affecting Bond Rating

One of the biggest factors that affect bond rating is a company's credit risk. Credit risk primarily refers to the company's ability to pay back its debts to its creditors. These debts include principal and interest payments on loans, dividends and insurance payments. Because a bond is a debt instrument, when investors purchase bonds, they become creditors of the company from which they bought the bond. A company that is less likely to default on its outstanding debt, meaning it demonstrates a high level of creditworthiness, generally has a higher credit rating. As the creditworthiness of a company decreases, the bond rating falls.

Bond rating agencies do not claim to be fortune tellers, but, like most investment instruments, bonds are forward looking. Credit rating agencies conduct extensive research as to the plausible future performance of a bond. This assessment affects a company's bond rating. Companies that have a history of good financial standing and demonstrate that its current financial standing is unlikely to change generally have high credit ratings. Companies that have experienced financial instability or financial difficulties generally receive a lower credit rating.

When a positive major corporate event occurs, such as the launch of an innovative product, or a negative corporate event occurs, such as a corporate scandal, bond rating agencies often place the bond rating of that company on review. Such events can affect a bond rating. In the case of a negative corporate event, the bond rating is often downgraded, because the company poses an increased risk of credit default and a drop in creditworthiness. A positive corporate event may upgrade the company's bond rating.