Ratings, Interest Coverage Ratios and Default Spread

What is this? This is a table that relates the interest coverage ratio of a firm to a "synthetic" rating and a default spread that goes with that rating. The link between interest coverage ratios and ratings was developed by looking at all rated companies in the United States. The default spreads are obtained from traded bonds. Adding that number to a riskfree rate should yield the pre-tax cost of borrowing for a firm.

Date of Analysis: Data used is as of January 2008

For large manufacturing firms (Mkt cap> 5 billion) For financial service firms (default spreads are slighty different)
If interest coverage ratio is       If long term interest coverage ratio is
> ² to Rating is Spread is greater than ² to Rating is Spread is
-100000 0.199999 D 20.00% -100000 0.049999 D 20.00%
0.2 0.649999 C 12.00% 0.05 0.099999 C 12.00%
0.65 0.799999 CC 10.00% 0.1 0.199999 CC 10.00%
0.8 1.249999 CCC 7.50% 0.2 0.299999 CCC 7.50%
1.25 1.499999 B- 6.50% 0.3 0.399999 B- 6.50%
1.5 1.749999 B 5.65% 0.4 0.499999 B 5.65%
1.75 1.999999 B+ 4.50% 0.5 0.599999 B+ 4.50%
2 2.2499999 BB 3.65% 0.6 0.749999 BB 3.65%
2.25 2.49999 BB+ 3.20% 0.75 0.899999 BB+ 3.20%
2.5 2.999999 BBB 2.50% 0.9 1.199999 BBB 2.50%
3 4.249999 A- 1.70% 1.2 1.49999 A- 1.70%
4.25 5.499999 A 1.50% 1.5 1.99999 A 1.50%
5.5 6.499999 A+ 1.40% 2 2.49999 A+ 1.40%
6.5 8.499999 AA 1.25% 2.5 2.99999 AA 1.25%
8.50 100000 AAA 0.75% 3 100000 AAA 0.75%
For smaller and riskier firms
If interest coverage ratio is      
greater than ² to Rating is Spread is
-100000 0.499999 D 20.00%
0.5 0.799999 C 12.00%
0.8 1.249999 CC 10.00%
1.25 1.499999 CCC 7.50%
1.5 1.999999 B- 6.50%
2 2.499999 B 5.65%
2.5 2.999999 B+ 4.50%
3 3.499999 BB 3.65%
3.5 3.9999999 BB+ 3.20%
4 4.499999 BBB 2.50%
4.5 5.999999 A- 1.70%
6 7.499999 A 1.50%
7.5 9.499999 A+ 1.40%
9.5 12.499999 AA 1.25%
12.5 100000 AAA 0.75%