Ratings, Interest Coverage Ratios and Default Spread

What is this? This is a table that relates the interest coverage ratio of a firm to a "synthetic" rating and a default spread that goes with that rating. The link between interest coverage ratios and ratings was developed by looking at all rated companies in the United States. The default spreads are obtained from traded bonds. Adding that number to a riskfree rate should yield the pre-tax cost of borrowing for a firm.

Date of Analysis: Data used is as of January 2014

For large non-financial service companies with market cap > $ 5 billion

Interest coverage ratio
> ≤ to Rating is Spread is
8.50 100000 Aaa/AAA 0.40%
6.5 8.499999 Aa2/AA 0.70%
5.5 6.499999 A1/A+ 0.85%
4.25 5.499999 A2/A 1.00%
3 4.249999 A3/A- 1.30%
2.5 2.999999 Baa2/BBB 2.00%
2.25 2.49999 Ba1/BB+ 3.00%
2 2.2499999 Ba2/BB 4.00%
1.75 1.999999 B1/B+ 5.50%
1.5 1.749999 B2/B 6.50%
1.25 1.499999 B3/B- 7.25%
0.8 1.249999 Caa/CCC 8.75%
0.65 0.799999 Ca2/CC 9.50%
0.2 0.649999 C2/C 10.50%
-100000 0.199999 D2/D 12.00%

 

For smaller non-financial service companies with market cap < $ 5 billion

If interest coverage ratio is      
greater than ≤ to Rating is Spread is
12.5 100000 Aaa/AAA 0.40%
9.5 12.499999 Aa2/AA 0.70%
7.5 9.499999 A1/A+ 0.85%
6 7.499999 A2/A 1.00%
4.5 5.999999 A3/A- 1.30%
4 4.499999 Baa2/BBB 2.00%
3.5 3.9999999 Ba1/BB+ 3.00%
3 3.499999 Ba2/BB 4.00%
2.5 2.999999 B1/B+ 5.50%
2 2.499999 B2/B 6.50%
1.5 1.999999 B3/B- 7.25%
1.25 1.499999 Caa/CCC 8.75%
0.8 1.249999 Ca2/CC 9.50%
0.5 0.799999 C2/C 10.50%
-100000 0.499999 D2/D 12.00%