CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
A bond is downgraded from BBB- to BB+ by the major rating agencies. The change is most likely to be significant to investors because the bond:
The downgrade most likely moves the bond from investment grade to non-investment grade. Many institutions are restricted from holding speculative-grade debt, so forced selling can occur and spreads typically widen, even though the coupon and call terms are unchanged.
- Awill have a lower coupon fixed by the indenture
- Bmoves from investment grade to non-investment gradeCorrect
- Cwill be repaid early at par under a standard call provision
Explanation
BBB- is the lowest investment-grade rating; BB+ is the highest speculative-grade rating. A fall across this line forces some investors to sell and typically widens the spread (fallen angel). The coupon is fixed and no call is triggered by a downgrade.
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