What Is Standard & Poor's (S&P)?

How Standard & Poor's (S&P) Works

The names "Standard" and "Poor" come from two financial companies that merged in 1941. In 2016, the company's name became "S&P Global." S&P Global specializes in providing credit ratings for bonds, countries, and other investments, but that's just one of the many financial market services it offers. The company uses its vast access to data to provide customized analysis and establish market indexes.

The S&P Global credit rating is a credit score that describes the general creditworthiness of a company, city, or country that issues debt. S&P uses the score to rate how likely a company is to meet its financial obligations. The ratings are for informational purposes only and are opinions—they aren't investment recommendations, nor do they predict the probability of default. 

S&P also rates the creditworthiness of individual bonds. There are several different types of bonds, all of which vary in their ratios of risk to return. You can use S&P bond ratings to help you decide whether to buy a bond. They will also give you a sense of how a country's economy is doing, which can help you with other investments like forex trades or foreign stocks.

How S&P Creates Its Ratings

S&P analysts create ratings via information they get from the company itself, as well as reliable economic, industry, and financial information. Analysts also meet with the company's management team. Using these resources, the analysts assess the company’s financial condition, operating performance, and policies. Most importantly, they form an opinion about the company's risk-management strategies.

In the beginning, Standard & Poor's charged a subscription fee for access to its credit reports. In 1968, it changed its revenue structure and started charging the companies it was rating, instead of the investors using the ratings.

In a 2002 congressional hearing, S&P said that it had changed its revenue structure to address rising costs and increased demand for credit ratings, though that hasn't stopped critics from speculating about the ability of S&P to evaluate its paying customers adequately.

How the S&P Ratings Scale Works

An S&P credit rating is a letter grade on a scale that differs depending on whether the rating is long-term or short-term. For long-term ratings, the best grade is AAA, which means that the company is highlight likely to meet its financial obligations. The worst is "D," which means the issuer has already defaulted. Ratings can also include a plus sign (which is better than standalone letters) or a minus sign (which is worse than standalone letters).

The company's short-term ratings include six grades, ranging from A-1 (the highest) to D (the lowest).

S&P is one of the three major credit rating agencies in the U.S. All three use similar ratings systems, though you may notice some small differences in the way those ratings are conveyed. For instance, a "BBB+" rating from S&P is comparable to a "Baa1" rating from Moody's.

S&P Bond Ratings

A bond that receives a high letter grade can pay a lower interest rate than one with a lower grade, because it isn't as risky, according to S&P. In exchange for a relatively safe investment, investors will settle for smaller returns. Companies, cities, and countries work hard to keep a high letter grade so they can save money by issuing bonds with low interest rates. The safest bonds are known as "investment-grade."

The table below shows the specifics for long-term bonds. Letter grades of BB+ or lower are considered "speculative." You may also hear them referred to as "high-yield" or "junk" bonds. These companies have to pay more in interest to offset the increased risk.

S&P also provides outlook ratings, which attempt to project how the entity will be faring in six months to two years, compared to how it's doing now. Those ratings are positive, negative, stable, or developing.

Country Ratings

S&P publishes ratings for more than 100 countries. The company analyzes how likely it is that a country will default on its sovereign debt. There are five areas of assessment: institutional and governance, economic structure and growth prospects, external finances, and fiscal and monetary flexibility.

Notable Happenings

Some critics blame the S&P and other rating agencies for the 2008 financial crisis. S&P and other ratings agencies gave AAA ratings to mortgage-backed securities as late as 2006. The following year, as the housing market began its downturn, the agencies quickly downgraded those securities. A Congressional inquiry later determined that these risky conditions were exacerbated by decades of deregulation of the financial industry.

As the recession worsened, governments increased spending to stimulate the economy. As a result, in 2011, S&P downgraded U.S. Treasury debt from AAA to AA+. S&P was concerned that Congress and President Barack Obama hadn't put together a solid enough debt-reduction plan. The credit downgrade sent the Dow plummeting in August 2011.

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