A+/A1: What it is, How it Works, Examples

What Is A+/A1?

A+ /A1 refers to two ratings issued to long-term bonds and bond issuers by the competing credit rating agencies Standard & Poor's (S&P) and Moody's respectively. S&P uses A+, and Moody's uses A1, but both indicate pretty much the same thing.

Both A+ and A1 sit squarely in the middle of the investment-grade category of their credit ranking systems. They signify that bonds are of high-quality and have many positive qualities, but do carry a slightly higher degree of long-term investment risk.

Understanding A+/A1

Both A+ and A1 represent the fifth-highest rating a debt issuer or a debt instrument can receive.

At Moody's, the A1 rating comes after the Aaa, Aa1, Aa2, and Aa3 ratings. The A rating itself denotes that the bond (or whatever security is being rated) is "upper-medium grade and subject to low credit risk." The modifier 1 indicates that "the obligation ranks in the higher end of its generic rating category."

At Standard & Poor's, the A rating comes after the AAA, AA+, AA, and AA- ratings. The A rating itself denotes a "strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances." S&P further fine-tunes the evaluation by adding a + or – to the letter.

Both A+ and A1 are six rankings above the cutoff that separates investment-grade debt from high-yield, or non-investment-grade, debt, which carries ratings of Baa1/BBB+, Baa2/BBB, Baa3/BBB-, or even lower. The A+/A1 rating signifies that the issuer or carrier has stable financial backing and ample cash reserves. The risk of default for investors or policyholders is very low.

The credit ratings assigned by the various rating agencies are based primarily upon the insurer's or issuer's creditworthiness; in a sense, they are a quantified assessment of the creditworthiness of a borrower. A+ and A1, like all ratings, can be interpreted as a direct measure of the probability of default. However, credit stability and priority of payment are also factored into the rating.

Example of A+/A1

For example, XYZ Corp. is a company that is looking to raise capital by issuing long-term debt. It is a company that produces a popular consumer product and has a strong balance sheet with lots of free cash flow. It issues a responsible amount of debt and is easily able to make interest payments on its bonds until they mature—for now.

However, there are some changes on the horizon that might affect the company's financial standing. There are signs that sales of its flagship product are slowing, and new environmental regulations might necessitate it making some costly upgrades to its factories and production methods.

As a result, Moody's and S&P rank XYZ's debt an A+/A1. In so doing, they are saying the company has adequate capacity to meet financial commitments, along with many positive investment attributes; but it also has elements susceptible to adverse effects of changes in economic conditions.