Skip to main content
← Back to B Definitions

Bb rating

A BB rating is a non-investment grade credit rating assigned by credit rating agencies to debt instruments or issuers, indicating a speculative level of Creditworthiness. This classification, a key element within the broader field of Credit Ratings, suggests that while the obligor may have some capacity to meet its financial commitments, it faces significant ongoing uncertainties and is particularly vulnerable to adverse business, financial, or economic conditions that could lead to default.32,,

The BB rating is one notch below investment grade and signifies an elevated Default Risk compared to higher-rated debt. Investors typically demand higher Yield for Bonds with a BB rating to compensate for this increased risk.31,30

History and Origin

The concept of credit ratings emerged in the United States in the mid-19th century, with mercantile credit agencies forming after the Panic of 1837 to assess the ability of merchants to repay debts. Lewis Tappan established one of the first such agencies in 1841. The modern era of credit rating agencies for securities began in 1909 when John Moody published the first publicly available ratings for railroad bonds. Other prominent firms, like Poor's Publishing Company and Standard Statistics Company (which later merged to form Standard & Poor's), followed in the 1910s and 1920s, adopting letter-based rating systems.,29,28

Initially, these agencies operated on an "investor pays" model, selling their rating manuals to subscribers. However, in the early 1970s, the dominant credit rating agencies shifted their business model to an "issuer pays" system, where the entities issuing the debt pay for the ratings.27,26 The role of these agencies was further formalized in 1975 when the U.S. Securities and Exchange Commission (SEC) began explicitly referencing credit ratings in its regulations, designating certain firms as "Nationally Recognized Statistical Rating Organizations" (NRSROs).,25 This regulatory recognition cemented their integral position in the Capital Markets.

Key Takeaways

  • A BB rating signifies a non-investment grade, or speculative, level of credit quality.
  • Debt instruments with a BB rating carry a higher risk of default compared to investment-grade securities.
  • Issuers of BB-rated debt typically offer higher yields to attract investors, compensating for the increased risk.
  • The capacity of an obligor with a BB rating to meet its financial obligations is sensitive to adverse business and economic conditions.

Interpreting the BB Rating

A BB rating indicates that an obligor or debt instrument possesses "significant speculative characteristics.",24 While there might be some protective features, these are often outweighed by major uncertainties or substantial exposure to unfavorable conditions., For instance, Fitch Ratings notes that a BB rating suggests an elevated vulnerability to default, particularly if business or economic conditions worsen over time. However, it also implies that some business or financial flexibility exists to support the servicing of financial commitments.23

For investors, a BB rating serves as a clear signal of increased Default Risk. Consequently, market participants typically expect a higher Yield from BB-rated Debt Securities compared to those with higher ratings, reflecting the additional risk they undertake.22

Hypothetical Example

Consider "TechInnovate Inc.," a growing technology company seeking to raise capital for expansion. Due to its relatively short operating history, significant reliance on a few key products, and a moderately leveraged balance sheet, major credit rating agencies assign its newly issued Corporate Bonds a BB rating.

This BB rating signals to potential investors that while TechInnovate is currently meeting its debt obligations, its financial health could be significantly impacted by market downturns, increased competition, or a failure of its new product lines. As a result, investors purchasing TechInnovate's bonds would expect a higher interest rate (coupon) than they would from a more established, highly-rated company. For example, if an investment-grade company's bonds might yield 4%, TechInnovate's BB-rated bonds might need to offer a 7% yield to attract sufficient investment. This higher coupon compensates investors for the increased risk of holding a Junk Bonds classification.

Practical Applications

BB ratings are crucial in various aspects of financial markets and investing:

  • Investment Decisions: Investors, particularly those with a higher Risk Tolerance, use BB ratings to identify High-Yield Bonds that offer potentially higher returns in exchange for greater risk.21 Conversely, institutional investors, such as pension funds, often have mandates that restrict them from investing in non-investment grade securities like those rated BB.
  • Borrowing Costs for Issuers: A company or government seeking to issue Bonds will find that its credit rating directly influences its borrowing costs. A BB rating means the issuer will likely pay a higher interest rate on its newly issued debt compared to an entity with an Investment Grade rating, reflecting the market's assessment of its Default Risk.20
  • Portfolio Diversification: For some investors, including BB-rated bonds in a Fixed Income portfolio can be part of a strategy to enhance overall portfolio yield, albeit with increased risk.19
  • Regulatory Frameworks: Credit ratings are often embedded in regulatory capital requirements for financial institutions. Historically, regulators, including the U.S. Securities and Exchange Commission (SEC), have utilized these ratings to determine capital charges on different grades of Debt Securities held by broker-dealers.18 For more details on bond ratings, the Financial Industry Regulatory Authority (FINRA) provides comprehensive resources for investors.

Limitations and Criticisms

Despite their widespread use, credit ratings, including the BB rating, have faced significant criticism. A primary concern is the potential for Conflict of Interest arising from the "issuer pays" business model, where the entity being rated also compensates the rating agency. Critics argue this model can create an incentive for agencies to issue overly favorable ratings to secure or maintain business.17,16,,15

Furthermore, credit rating agencies received sharp criticism for their role in the 2007-2008 Financial Crisis, particularly for assigning high ratings to complex mortgage-related securities that subsequently defaulted.,14,,13 Some analyses suggest that agencies failed to adequately recognize and warn of the risks associated with these instruments, contributing to the crisis.12 Even after reforms, concerns persist that the fundamental problems leading to the crisis—such as overreliance on credit ratings and a lack of accountability—remain significant. Rat11ings may also exhibit latency, meaning they can be updated after Market Prices have already moved in response to credit events, potentially putting investors at a disadvantage if they solely rely on ratings for investment decisions.

##10 BB Rating vs. BBB Rating

The distinction between a BB rating and a BBB Rating is crucial because it marks the boundary between speculative and investment-grade debt.

FeatureBB RatingBBB Rating
CategoryNon-investment grade (Speculative, Junk Bonds)Investment grade
Default RiskElevated vulnerability to default risk, particularly in adverse conditions.,9Currently low expectation of default risk, but more vulnerable to adverse conditions than higher ratings.,
8Financial HealthFaces major ongoing uncertainties; adequate capacity may be impaired by adverse conditions.,
6 Investor ViewTypically requires higher yields to compensate for increased risk.C5onsidered suitable for prudent investment, generally lower yields.

4The BBB rating is the lowest within the Investment Grade category, indicating good credit quality, while the BB rating, the highest in the speculative category, points to a more significant risk profile.,

#3#2 FAQs

What does a BB rating mean for an investor?

A BB rating indicates that an investment carries a speculative level of Creditworthiness and is considered non-investment grade. This means there's a higher Default Risk compared to higher-rated securities, and the investment is more sensitive to economic downturns. Investors typically demand a higher Yield to compensate for this increased risk.

How does a BB rating differ from investment grade?

A BB rating is below Investment Grade. Investment-grade ratings, such as BBB and higher, suggest a lower risk of default and are typically considered more secure for investors. BB-rated Bonds fall into the "speculative" or "Junk Bonds" category, indicating a higher probability that the issuer may struggle to meet its financial obligations, especially in challenging economic environments.

Which agencies assign BB ratings?

Major Credit Rating Agencies such as Standard & Poor's (S&P) and Fitch Ratings assign the BB rating. Moody's Investors Service uses an equivalent rating of Ba2 to denote a similar level of credit risk.,

#1## Are BB-rated bonds always risky?
While BB-rated bonds are inherently considered speculative and carry a higher degree of Default Risk than investment-grade bonds, the term "risky" is relative to an investor's overall portfolio and risk tolerance. These bonds can offer higher potential returns, which attracts certain investors. However, they are more vulnerable to adverse economic conditions and company-specific challenges, meaning the risk of loss is greater. The CFA Institute provides resources on understanding these risks.