What it means
The company traces back to two older firms. One was started by Henry Varnum Poor in the nineteenth century to publish information about railroads, and the other, Standard Statistics, was a later financial data business.
They merged in 1941 to become Standard & Poor's, and today the brand sits within S&P Global. The credit ratings side evaluates how likely a borrower is to repay its debts.
Companies, governments and structured products receive letter grades, with AAA the strongest and D indicating default. Investors, lenders and regulators use these opinions when deciding how much risk they are taking and how much interest to demand.
The index side, now operated by a joint venture called S&P Dow Jones Indices, publishes benchmarks such as the S&P 500 and many others for specific sectors, company sizes and regions. These indices are used to track market performance and as the basis of index funds and exchange-traded funds that hold billions of dollars of investor money.
For business owners the name appears in several practical places. A bond prospectus will often state the rating from S&P, a loan agreement may require a company to maintain a minimum rating, and board reports often compare company share performance with an S&P index.
It helps to remember that a rating is an opinion rather than a guarantee. S&P is one of a small number of major rating agencies, and its ratings are paid for by the issuers in most cases, so users should read them together with the underlying financial statements.
One practical tip is to check which S&P product a colleague means before acting on a comment. A remark that S&P has downgraded a company is about its credit rating, while a remark that the S&P is down is about the stock index.
Both can appear in the same news bulletin, so the context decides the meaning.
In practice
Real-world examples.
Example
A finance director preparing a bond issue is told that an S&P rating of BBB- or higher is investment grade. She works out that an improvement of one notch could cut the interest rate by 0.3 percentage points, which on a $100,000,000 issue saves her company $300,000 a year.
Example
A fund manager compares her portfolio's return of 9% with the S&P 500 return of 11% over the same year. She explains to clients the sectors that caused the shortfall, noting that a handful of very large technology shares accounted for much of the index gain.
Example
A supplier checks the S&P credit rating of a large customer before agreeing generous payment terms. The rating helps it decide how much unpaid credit it can safely extend, and the credit manager reviews it again every six months in case the grade has moved.
Case study
Seen in the real world.
Redstone Logistics is an entirely fictional freight company that wants to refinance $150,000,000 of debt. In this illustrative story, the finance team knows that a lower credit rating will mean a higher cost of borrowing, so they begin preparing months in advance.
They meet the rating agency's analysts, share a clear five-year plan and reduce short-term borrowing. The agency raises its outlook on the company from stable to positive, a signal that a higher rating may follow.
The company borrows at an interest rate half a percentage point lower than it would have paid a year earlier. The illustrative lesson is that a rating is partly earned through transparent communication and sensible financial policy. The finance director later told the board that the same discipline that helped the rating, such as clear targets for borrowing and regular reporting, also made life easier with the company's banks and suppliers. Over the following year the company also negotiated cheaper terms on a revolving credit facility, because its lenders could point to the stronger rating when approving the lower margin.
Watch out
Common mistakes.
- Using "S&P" to mean only the stock index, when it is also one of the major credit rating agencies.
- Treating a credit rating as a guarantee, when it is an opinion about likelihood of repayment.
- Confusing the S&P 500 with the whole market, when it covers around 500 large US companies.
Questions
People also ask.
What does S&P stand for?
It stands for Standard & Poor's, the name of the company that was formed in 1941.
Is a high S&P rating the same as a safe investment?
Not exactly, since it reflects credit risk but not market price changes, inflation or interest rate moves.
Does S&P own the Dow Jones Industrial Average?
No, the Dow is a separate index, although S&P Dow Jones Indices now calculates it.
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