What Is Notching?
Notching is the practice by credit rating agencies to give different credit ratings to the particular obligations or debts of a single issuing entity or closely related entities.
Rating distinctions among obligations are made based on differences in their security or priority of claim. With varying degrees of losses in the event of default, obligations are subject to being notched higher or lower. Thus, while company A may have an overall credit rating of “AA,” its rating on its junior debt may be “A.”
Key Takeaways
- Notching is when a credit rating agency bumps up or down the credit rating on an issuer’s specific debts or obligations.
- This is different than a credit agency upgrading or downgrading the company or issuer as a whole.
- Because certain types of debt—for instance, subordinated debts—are inherently riskier than senior debts, the rating on…
