Interest Coverage Ratios and Bond Ratings

Use the excel spreadsheet that accompanies this table if you want to estimate the rating for your firm.


For large manufacturing firms For financial service firms
If interest coverage ratio is If long term interest coverage ratio is
> < Rating is Spread is > < Rating is Spread is Operating Income Decline
-100000 0.199999 D 10.00% -100000 0.049999 D 10.00% -50.00%
0.2 0.649999 C 7.50% 0.05 0.099999 C 7.50% -40.00%
0.65 0.799999 CC 6.00% 0.1 0.199999 CC 6.00% -40.00%
0.8 1.249999 CCC 5.00% 0.2 0.299999 CCC 5.00% -40.00%
1.25 1.499999 B- 4.25% 0.3 0.399999 B- 4.25% -25.00%
1.5 1.749999 B 3.25% 0.4 0.499999 B 3.25% -20.00%
1.75 1.999999 B+ 2.50% 0.5 0.599999 B+ 2.50% -20.00%
2 2.499999 BB 2.00% 0.6 0.799999 BB 2.00% -20.00%
2.5 2.999999 BBB 1.50% 0.8 0.999999 BBB 1.50% -20.00%
3 4.249999 A- 1.25% 1 1.49999 A- 1.25% -17.50%
4.25 5.499999 A 1.00% 1.5 1.99999 A 1.00% -15.00%
5.5 6.499999 A+ 0.80% 2 2.49999 A+ 0.80% -10.00%
6.5 8.499999 AA 0.50% 2.5 2.99999 AA 0.50% -5.00%
8.50 100000 AAA 0.20% 3 100000 AAA 0.20% 0.00%
For smaller and riskier firms
If interest coverage ratio is
greater than Less than Rating is Spread is
-100000 0.499999 D 10.00%
0.5 0.799999 C 7.50%
0.8 1.249999 CC 6.00%
1.25 1.499999 CCC 5.00%
1.5 1.999999 B- 4.25%
2 2.499999 B 3.25%
2.5 2.999999 B+ 2.50%
3 3.499999 BB 2.00%
3.5 4.499999 BBB 1.50%
4.5 5.999999 A- 1.25%
6 7.499999 A 1.00%
7.5 9.499999 A+ 0.80%
9.5 12.499999 AA 0.50%
12.5 100000 AAA 0.20%

Last Update: 2/3/98

Name: Aswath Damodaran