In this paper, we have developed models to find out as to what factors are important in determining the bond ratings of the non-financial firms which are included in S&P 500 index. Our analysis is different from other analyses in the literature because we have used the more recent data, i.e., the ratings belong to the years 2008, 2009 and 2010. We have performed two types of analyses. In the first analysis, all the variables are used as explanatory variables after eliminating some variables to avoid multicollinearity. In the second analysis, factor analysis is performed to group the variables into factors, and variables whose correlations with the factors are the highest are used as explanatory variables. In both the analyses, multiple discriminant analysis, ordered logit, and ordered probit models are estimated. The best model is the ordered logit model that used all the variables. The important factors that determine the bond ratings are long-term liabilities/total assets ratio, return on equity, net profit margin, trade payables, and operating income. The firms that need to improve their bond ratings must pay attention to these factors. Also, by using the models presented in the paper, investors can have an idea about the credibility of the issuers.

Bonds are the main long-term debt instruments that businesses issue to raise capital for their long-lived investments. Individuals and institutions all around the world are possible investors of a bond issue. The main concern of these investors is whether the issuer has the ability to fulfill its financial obligations. The ratings assigned by the professional organizations such as Standard & Poor’s (S&P) and Moody’s play an important role in providing information about the credibility of the issuers. The globalization of financial markets has accelerated the need for reliable information. As a result, the ratings that reflect the opinions of the rating agencies have gained considerable importance. Since ratings are very important for a business to market its bonds, the factors that affect bond ratings have attracted the attention of researchers. Over the last 50 years, many research papers have been written on the factors that play an important role in determining bond ratings.

In the late 2008, the world had witnessed a major financial crisis. Many corporations whose debt instruments received high ratings from the rating agencies failed, which led to severe criticism of the rating agencies. Once again the important factors in determining the debt ratings gained attention and many experts doubted whether the rating agencies place more importance on subjective factors than objective ones. Motivated by these developments, we decided to revisit the factors important in bond ratings by using the most recent data, especially the data belonging to the crisis period.

This paper attempts to develop models to predict the bond ratings of S&P 500 firms by using multivariate statistical methods. Our purpose is twofold. First, we find out as to which model best predicts the ratings; and second, we determine as to which firm-specific factors are important in determining the bond ratings.

Our analyses include non-financial firms. As the data and ratios used for examining the performance of financial services firms are different, we have excluded the financial service firms and included only the non-financial firms. The findings show that the best model that predicts bond ratings is ordered logit. The most important factors that determine bond ratings are long-term leverage, operating income (as an absolute value), and trade payables (as an absolute value).

In the next section, a brief literature review is presented, followed by data and methodology. In the subsequent section, results of the analyses are discussed, and the last section of the paper offers conclusion.

Applied Finance Journal, Impact, Derivative, Trading, Liquidity, Beta, Underlying, Stocks, India.