Reviewed by Sep 30, 2020| Updated on
The practice followed by credit rating agencies to allot ratings that is a few notches higher or a few notches lower between associated enterprises is called notching. The distinction in ratings is made based on the priority of claim or the difference in their security.
Credit ratings are given to companies to indicate their creditworthiness and the ability to meet debt and other obligations. In addition, credit rating agencies may also provide a rating on the particular debts and other obligations offered by the company. This rating may differ from the overall rating of the issuing company's rating due to the risks and restrictions pertaining to those obligations.
The practice of notching also applies to debt securities issued by subsidiaries and holding companies. The level of notching also depends on the collaterals for the securities issued. Moody's has also published guidance on notching methodology. The guidance was updated in 2017.