hard · Debt Capital Markets credit-ratings-risk
An issuer's senior unsecured notes carry a split rating of Baa3/BBB-/BBB- from Moody's, S&P, and Fitch. Following a debt-funded recapitalization, Moody's downgrades the issue one notch to Ba1, while S&P and Fitch affirm BBB-. The bond currently sits in a major bond index (e.g., the Bloomberg US Aggregate) that determines investment-grade eligibility for split-rated credits using the middle, or median, rating among the three agencies.
Under that median-rating index methodology, what is the immediate effect of the Moody's downgrade on the bond's index status?
- The bond is dropped from the index immediately, since a downgrade by any single rating agency below investment grade triggers automatic exclusion.
- The bond stays in the investment-grade index, since the median of the three agency ratings is still BBB-/Baa3, meeting the inclusion threshold.
- The bond is reclassified as high yield, because averaging the three numeric rating scores now falls below the investment-grade cutoff.
- The bond is excluded as high yield, because index eligibility is determined by the single lowest rating among the three agencies.
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