Category: Notching

Notching is the practice by credit rating agencies to give different credit ratings to the particular obligations or debts of a single issuing entity or closely related entities. One and the same issuer may receive a variety of different credit ratings from the same credit rating agency from the same group of rating analysts of a rating committee at the same time. Rating distinctions among obligations are made based on differences in their security or priority of claim. With varying degrees of losses in the event of default, obligations are subject to being notched higher or lower. Thus, while a company may have an overall credit rating of BBB+, its rating on its junior debt may be BBB- or even lower, BB+ or BB. The degree of notching might be based on consideration of the nature of the relationship between the entity and a sponsor government, e.g.: the more integrated, the less notching down from the general government issuer default rating, all else being equal. Individual bankruptcy filings can be complex and idiosyncratic, with outcomes subject to negotiation with multiple parties. Rating agencies will evaluate individual cases as they occur rather than developing general rules for notching if bankruptcy becomes a reality.