RATING DOWNGRADE Meaning and
Definition
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A rating downgrade is a term used in the financial industry to describe a reduction in the creditworthiness or investment quality of a company, government, or financial instrument. It refers to a downward revision of the rating assigned to a particular entity or security by credit rating agencies.
Credit rating agencies play a crucial role in assessing the creditworthiness of borrowers or issuers of debt securities. They assign ratings like AAA, AA, A, BBB, etc., to indicate the credit risk associated with investing in those entities or financial instruments. These ratings influence the interest rates at which the entity can borrow and the overall trustworthiness for market participants.
A rating downgrade occurs when a credit rating agency revises an entity's credit rating to a lower grade. This revision is typically based on a reassessment of the entity's financial condition, profitability prospects, or ability to meet its financial obligations. Downgrades can also be triggered by adverse changes in the economic, political, or regulatory environment.
The consequences of a rating downgrade can be significant. It usually leads to increased borrowing costs for the entity, as investors demand higher interest rates to compensate for the higher risk. It can also result in reduced access to credit markets or an overall loss of market confidence. This, in turn, can impact the entity's ability to raise capital and negatively affect investor sentiment, leading to a decline in its stock price or bond values.
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Etymology of RATING DOWNGRADE
The word "rating downgrade" can be broken down into two parts: "rating" and "downgrade".
"Rating" originated from the Old Norse word "reiting", which means "a valuation or estimation". It entered the English language around the 15th century. In the context of "rating downgrade", it refers to the evaluation or assessment of something, typically the creditworthiness or financial stability of a company, government, or security.
"Downgrade" comes from the prefix "down-" meaning "lower" or "reduced", combined with the noun "grade", which is derived from the Latin word "gradus", meaning "step" or "degree". The word "downgrade" emerged in English during the 19th century and refers to the act of reducing or lowering the rank, level, or quality of something.
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