Rating agencies: what is their role?

May 2026, by Mário Pires

Credit rating agencies are organizations that assess and rate the financial capacity of debt issuers, such as governments and companies, to meet the obligations they have undertaken towards those who purchase their bonds.

Their primary role is to provide an independent opinion on the issuer’s ability to repay the capital provided and pay the agreed interest within the agreed timeframe. Based on this assessment, they assign a rating that indicates the level of credit risk they associate with a specific issuer or security.

The first rating agencies emerged in the US at the beginning of the 20th century to help investors scattered throughout the country obtain reliable information about the financial soundness of companies and the bonds they issued.

Moody’s was a pioneer in 1909, initially focusing on bonds linked to railway expansion in its “Analysis of Railway Investments”. It remains a leading authority in this field today, alongside the US-based Standard & Poor’s and Fitch Ratings. Over time, they have made the rating a benchmark for those operating in the global bond market.

How does the rating system work? 5 basic rules

The ratings assigned by credit rating agencies cover the category of debt considered to be the safest – investment-grade bonds – and securities classified as speculative-grade or higher-risk (high yield). These categories are assigned ratings that express the risk associated with a loan (i.e., the probability that the borrower will not be able to repay it, with the defined interest and within the agreed timeframe). Although there are slight variations between the notations of different agencies, the structure is similar and reflects five central ideas:

• “A” is better than “B” and so on. The earlier in the alphabet the letter, the better the credit rating (the lower the perceived risk).
• The scale starts at the Investment Grade level:

AAA -Highest credit quality and virtually no risk;  

AA - Very high credit quality; 

A - Credit of good quality, but sensitive to adverse conditions;  BBB – Less secure credit, but still of adequate quality.

• In the credit category that reflects speculative risk, the sequence begins where the previous one left off: 

BB -Credit is more vulnerable to economic deterioration;

B -High risk of the agreement not being fulfilled;

CCC - Very risky credit;

CC and C – Extremely high risk of default;

D – Non-compliance already verified.

• In addition to the main rating, shown in capital letters, agencies may add signs (+ or –) or numbers and lower-case letters to indicate intermediate grades.
• The higher the credit risk, the greater the reward for bondholders is usually, but the greater the likelihood that the agreed terms will not be met.

A very common Portuguese example.

Following the 2008 global financial crisis and the increase in sovereign debt in several Eurozone countries, Portugal faced growing difficulties in issuing sovereign debt. With a heightened perception of risk regarding the country’s ability to meet its obligations on its government bonds, the major credit rating agencies began to downgrade the rating of this debt. Portugal's rating has been downgraded to speculative grade, and the consequences are clear: 

• The interest rates demanded by investors to buy bonds have risen significantly – in 2012, they reached 15% on 10-year bonds;
• Institutional investors with mandates restricted to lower-risk investment-grade debt were forced to sell the bonds they held;
• The downgrade of the country’s credit rating ultimately affected the ratings of domestic companies, which is to be expected, as the sovereign rating tends to serve as a benchmark for the whole country and, in particular, for its financial system.

What are the important things to remember about the ratings?

Ratings provide useful information to investors, helping them to estimate the relative probability of default and establishing a common metric for comparing the opportunities and risks of bond issuers across different sectors and regions.

However, ratings are technical opinions and not guarantees. They should therefore be incorporated into a multidimensional approach to active management, which includes both macroeconomic assessment and ongoing analysis of the situation of issuers, their sectors and markets.