It is the practice of predicting or forecasting the ability of a supposed debtor to pay back the debt or default.[1].
They use letter designations such as A, B, C. Higher grades are intended to represent a lower probability of default.
Agencies do not attach a hard number of probability of default to each grade, preferring descriptive definitions such as: "the obligor's capacity to meet its financial commitment on the obligation is extremely strong," or "less vulnerable to non-payment than other speculative issues…" (Standard and Poors' definition of an AAA-rated and a BB-rated bond respectively).
[7] However, some studies have estimated the average risk and reward of bonds by rating.
The Standard & Poor's rating scale uses uppercase letters and pluses and minuses.
[13] The Moody's rating system uses numbers and lowercase letters as well as uppercase.
The ECB uses a first, best rule among the four agencies that have the designated ECAI status,[16] which means that it takes the highest rating among the four agencies – S&P, Moody's, Fitch and DBRS – to determine haircuts and collateral requirements for borrowing.
Under the EU Credit Rating Agency Regulation (CRAR), the European Banking Authority has developed a series of mapping tables that map ratings to the "Credit Quality Steps" (CQS) as set out in regulatory capital rules and map the CQS to short run and long run benchmark default rates.