What it means
The scale starts at Aaa and then runs Aa1, Aa2 and Aa3 before reaching the single-A band, so Aa1 is the first notch below the summit. The agencies reserve the top grade for a very small group of borrowers, which makes this notch the realistic ceiling for most large institutions.
Being here says the agency sees only a remote chance of non-payment, even under stress. The commercial value of the rating is the price and reliability of funding.
Borrowers in this band issue debt at spreads close to the government benchmark, and they can usually raise money in markets where lower rated issuers find no buyers at all. That access is most valuable precisely when conditions are worst.
Who actually holds these ratings tells you what the band rewards. Typical examples are strong sovereign and sub-sovereign borrowers, supranational institutions, large regulated utilities with predictable cash flows and a handful of very conservatively financed corporates.
The common thread is stable, visible income and low leverage rather than fast growth. Because the band is so high, the risk is asymmetric.
There is one notch of upside and a long ladder of downside, so management of a company rated here is usually defending a position rather than chasing an upgrade. That often shows up as conservative dividend policy, modest leverage targets and a willingness to fund growth with equity or retained earnings.
The distinction between Aa1 and Aaa is narrower in default terms than in reputation terms. Some mandates, collateral rules and index products treat only the top grade as equivalent to a benchmark asset, so the single notch can affect who is allowed to hold the debt.
That is why the step from Aa1 to Aaa is pursued much harder than the arithmetic saving alone would justify.
In practice
Real-world examples.
Example
A supranational development institution rated Aa1 raises $2,000,000,000 in a single morning during a period of market stress. Investors treat the issue as a near-benchmark asset, so the book builds quickly even though lower rated borrowers have postponed their own deals that week.
Example
A state government rated Aa1 is advised that reaching the top grade would cut its borrowing spread by around 0.10%. On a $900,000,000 annual issuance plan that is $900,000 a year, so the treasury department builds a rainy day reserve and publishes a debt affordability policy to support the case.
Example
A pharmaceutical group rated Aa1 is offered a large debt-funded acquisition. The board declines, partly because the agency has indicated the rating would fall by two notches, and the group's commercial paper programme depends on the market's confidence in its short-term credit quality.
Formula
Calculation
All-in borrowing cost = benchmark yield + credit spread for the rating.
Annual interest cost = principal x all-in borrowing cost.
Suppose a regulated water utility rated Aa1 issues a $30,000,000 ten-year bond. The ten-year government benchmark yield is 3.80% and investors require a spread of only 0.55% for this rating.
All-in borrowing cost = 3.80% + 0.55% = 4.35%.
Annual interest cost = $30,000,000 x 0.0435 = $1,305,000.
Total interest over the ten-year term = $1,305,000 x 10 = $13,050,000.
Had the same utility been rated three notches lower in the single-A band and paid a spread of 1.15%, its cost would be 4.95%, or $1,485,000 a year, which is $180,000 more every year for the same cash raised.Case study
Seen in the real world.
Thornbury Grid Holdings is an invented, illustrative company created to show this rating in action. It owned regulated electricity networks, earned revenue set by a regulator for five-year periods, and held an Aa1 rating that it treated as a strategic asset.
When an unregulated renewables developer came up for sale, Thornbury's strategy team argued that the business would add growth the networks could never deliver. The finance director modelled the acquisition against the agency's published thresholds and found that the earnings volatility of the target, not the debt used to buy it, would be enough to cost the company a notch. The board approved a smaller deal funded half with equity, keeping both the rating and a foothold in the new market.
The illustrative lesson is that at this level of the scale, the quality of earnings matters as much as the amount of debt. Thornbury's funding advantage was worth more over a decade than the growth it had been asked to buy.
Watch out
Common mistakes.
- Assuming the number one in Aa1 means it is the best rating available, when Aaa sits above the whole Aa band.
- Believing a borrower rated this highly cannot be downgraded quickly, when a single large acquisition or policy change can move it several notches.
- Comparing Aa1 with AA from another agency as equivalent, when the matching grade on the letter-and-sign scale is AA+.
Questions
People also ask.
How many borrowers hold ratings this high?
Very few, and the population is dominated by governments, supranational bodies and regulated monopolies rather than ordinary trading companies.
Is it worth spending money to move from Aa1 to Aaa?
Only where the spread saving, mandate eligibility or collateral treatment justifies the capital held back, which is a calculation rather than a point of pride.
Does a high rating remove the need for liquidity planning?
No, because the rating itself depends partly on committed facilities and cash buffers, so abandoning them is one of the fastest ways to lose it.
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