The rating is assigned by a specialized agency based on analysis of financial position, industry conditions, management quality, and debt structure. It is expressed as a letter designation on a scale from the highest level of reliability to default status and includes a forecast of change.
The scale is divided into two categories. Investment grade indicates a high probability of meeting obligations. Speculative grade indicates substantial dependence on market conditions; such issues offer higher yields as compensation for risk.
National and international scales are structured differently. An international rating compares an issuer with all borrowers worldwide and is capped by the country's rating; a national rating compares issuers within a single country. Direct comparison of letter designations across different scales leads to incorrect conclusions.
A rating is an opinion on credit risk, not a recommendation or guarantee. It says nothing about the fairness of a security's price and may not reflect the current situation if not reviewed for a long time. Best practice: look not only at the letter designation but also at the assignment date, forecast, and which agency issued it.