B1/B+: What It Is, How It Works, Special Considerations

What Is B1/B+?

B1/B+ are one of several non-investment grade credit ratings (also known as "junk") that may be assigned to a company, fixed-income security, or floating-rate loan (FRN). These ratings signify that the issuer is relatively risky, with a higher-than-average chance of default. B1/B+ are ratings below investment grade but still one of the highest ratings in the non-investment grade bracket. Moody’s Corporation uses B1, while S&P Global Ratings and Fitch Ratings use B+.

Understanding B1/B+

The ratings assigned by the various rating agencies are based primarily on the issuer's creditworthiness. This rating can, therefore, be interpreted as a direct measure of the probability of default. Ratings generally fall into two categories: investment grade and non-investment grade. Bonds that receive a non-investment grade rating are also known as "junk bonds."

Credit ratings are issued primarily by three rating agencies: Moody's, Standard & Poor's, and Fitch. Moody's uses a combination of uppercase letters and numbers while S&P and Fitch use uppercase letters and plus and minus signs. For example, a B1 rating in the Moody's system is equal to a B+ in the S&P/Fitch system.

Ratings are assigned to bonds, floating-rate loans, and companies as a whole. Long-term ratings, as well as short-term ratings, are issued. Short-term ratings follow a different taxonomy. Credit ratings are also issued on government debt and follow the same system used for rating corporations.

Long-term investment-grade ratings run from Aaa (Moody's) and AAA (S&P/Fitch), indicating the most creditworthy bonds/loans or companies, to Baa3 (Moody's) and BBB- (S&P/Fitch). Non-investment grade ratings run from Ba1 (Moody's) and BB+ (S&P/Fitch) to C in the Moody's system, indicating the lowest rating above default. The lowest rating in the S&P/Fitch system is D for default.

Bond and Issuer Ratings

When a company wants to issue a bond to raise money for any one of many purposes, it typically seeks out the services of the rating agencies to designate their credit opinions on the bond issue and the issuer itself. The ratings will assist in the price discovery process of the bond when it is marketed to investors.

A B1/B+ rating is below investment-grade, sometimes referred to as speculative, high-yield (HY), or junk. Thus, the yield on the bond is generally higher than on an investment-grade security to compensate for the greater risk of payment default that the bond investor is taking on. The issue and issuer usually have the same rating, but they could be different if, for example, the issue is enhanced with additional credit protection for investors.

The Bottom Line

Credit rating agencies rate bonds and issuers based on creditworthiness: the likelihood that the bond will make its interest payments and be repurchased at maturity, in other words, evaluating the likelihood of default.

Ratings are based on a scale, which is broken down into two categories: investment grade and non-investment grade, with the former being of high quality with a low likelihood of default, but also with a lower interest rate due to the reduced risk. When investing in a bond, it's important to understand the credit rating that's been assigned to it to know the risk you're taking on.