Downgrade
A change in the
rating of a
bond or other
security in a downward direction. For example, a bond that had previously been rated
AAA may be downgraded to
AA. Downgrades are considered detrimental because they mean the
ratings agency believes that the
issuer of the security is less likely to be able to fulfill its obligations, such as
coupon payments. A downgrade increases the
cost of funds for the issuer because
investors expect a higher
return in exchange for the increased risk on the
security. See also:
Upgrade.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
downgrading
A reduction in the quality rating of a security issue, generally a bond. A downgrading may occur for various reasons including a period of losses, or increased debt service required by restructuring a firm's capital to include more debt and less equity. For example, takeover targets that engage in stock buybacks to prop up the price of their shares are subject to debt issue downgrading by the rating agencies. Compare
upgrading.
Case Study In late 2000 Moody's Investors Service, a major bond rating agency, downgraded the debt of Imax Corportion, the well-known big-screen movie company. The downgrading occurred amid bad times for the movie industry. Carmike Cinemas, a major theater company, had recently filed for bankruptcy, and Regal Cinemas, America's biggest theater chain, announced it might follow Carmike's lead. Concerned about Imax's financial viability, Moody's reduced its rating for the firm's senior notes from Ba2 to B2. It also lowered the rating for Imax's convertible subordinated notes from B1 to Caa1. The downgrading of Imax debt made it more difficult for the firm to obtain additional financing.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
downgrading
the re-classification of a product as sub-standard or second quality. See QUALITY CONTROL, TOTAL QUALITY MANAGEMENT.Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson