over 3 years ago • 2 mins
Automotive and aerospace giant Rolls Royce found itself in a heap of trouble late last week when it had the quality of its debt downgraded to “junk” 🗑
Standard & Poor’s (S&P) is a credit rating agency, which means it assesses the creditworthiness of a company or country and issues a report with its findings. Investors then use those reports to figure out just how risky the bonds of the company or country might be, as well as to make more informed investment decisions.
S&P reckons that since Rolls Royce is anticipating lower cash flow and a prolonged stint of weak profitability, its bonds are now a riskier proposition 😬 And given that analysts are expecting coronavirus-hobbled travel to halve Rolls’ airplane engine service market in the next few years, that’s probably no great LEAP in logic. Rolls probably knows that better than anyone, which might be why it announced 9,000 job cuts just last week.
Some bond investors who promise to limit how much risk they’ll take – like those committed to “investment grade” bonds, which have been deemed by the likes of S&P to be safe enough for most people – might now be forced to sell their Rolls bonds 🗂 That’s especially true if rival credit rating agencies with a more positive view on Rolls change tack and follow S&P’s lead.
Rolls’s turmoil doesn’t necessarily mean you should avoid debt altogether. For companies, borrowed money might build a factory that’ll make products they can sell, while for you personally, a mortgage could help you buy a property that might increase in value 🏡 That’s good debt. Bad debt, on the other hand, is the cash a company borrows to pay its dividend, or a credit-fueled luxury holiday.
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