Notching
Corporate Credit Analysis glossary · Ratings, Syndication & Market Dynamics
Definition
The rating-agency practice of adjusting an issue rating above or below the issuer credit rating based on recovery prospects (seniority, collateral, structural subordination). Senior secured debt is notched up; subordinated debt is notched down.
Notching in plain English
An issuer might have one overall credit rating, but not all of its bonds are equally safe — notching adjusts each specific bond up or down from that baseline depending on how likely you are to get paid back if things go bad. Debt that's first in line and backed by collateral gets "notched up" (rated a bit higher); debt that's last in line gets "notched down." Picture a company that owes several people: whoever holds the deed to the building recovers more than whoever just has an IOU, even though it's the same company failing. Notching puts that recovery difference into the rating itself.
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