Credit rating
A credit rating is a graded assessment of how likely a borrower is to repay its debt in full and on time, used by lenders and bond investors to price and compare credit risk.
See it move
Credit ratings rank borrowers from a top tier of the safest issuers down to a speculative tier with materially higher default risk. On a €10,000,000, five-year loan at a 3.00% benchmark rate, a top-tier borrower pays a 0.80-point spread, or €380,000 a year; a speculative-tier borrower pays a 3.50-point spread, or €650,000 — €270,000 more for the same loan.
Check yourself
A company wants to borrow €5,000,000 for one year. The benchmark risk-free rate is 2.50%. A highly rated (investment-grade) borrower pays a credit spread of 0.60 percentage points over the benchmark, while a lower-rated (speculative-grade) borrower pays a spread of 4.00 percentage points over the same benchmark. How much MORE annual interest does the lower-rated borrower pay compared to the highly rated borrower, for the same €5,000,000 loan?