What does it mean to downgrade debt?
In general, when an issuer of debt has its credit rating downgraded, that often means it has to pay a higher interest rate to compensate for the potentially higher risk of default it poses..
What happens if a bank gets downgraded?
In general, institutions with lower credit ratings must pay higher borrowing costs because investors view them as riskier bets.
However, Aleman said, the impact of the latest downgrade will be limited because it mainly reflects what markets already knew..
What is an example of a downgrade risk?
Downgrade Risk Downgrades result when rating agencies lower their rating on a bond—for example, a change by Standard & Poor's from a B to a CCC rating.
Downgrades are usually accompanied by bond price declines..
Why is a credit downgrade bad?
The downgrade signals that the company is less creditworthy than investors previously thought, making it difficult to borrow in the future.
The downgrade may make existing debt more expensive, if its interest rate is linked to the credit rating.
All of these effects hurt shareholders, causing the stock price to drop..
- A ratings downgrade hampers the company's ability to borrow.
Lenders may hesitate loaning to such companies and may not refinance its existing debt.
This could, in turn, impact the future growth plans of the company. - In general, institutions with lower credit ratings must pay higher borrowing costs because investors view them as riskier bets.
However, Aleman said, the impact of the latest downgrade will be limited because it mainly reflects what markets already knew.
