1. Sometimes all bonds are issued by the same issuer, but there is a huge difference in credit ratings. For example one is BA3 (Moody) while another is CAA1. The default risk is much higher in CAA/CA grades (could be as high as about 50% chance of bankruptcy within one year), but much less in BA grades. However BA3 bond is actually very risky in this case if it is estimated the company faces a high risk of bankruptcy. What is the reason behind such a huge difference? 2. Let's say the yield of the CAA bond is twice as high as that of the BA bond from the same issuer. After detailed analysis, we are certain the company won't go bankrupt (i.e. investors could get back money) when the bond matures. Is it safe to buy CAA bonds in this case? As long as the company won't go bankrupt, it doesn't seem there is much difference in risk. It is a great opportunity. Are there any other risks that we have overlooked? Thank you very much for your answer.
for single issuer with multiple issuances, financial being equal, it doesn’t matter, lower rating has lower priority of claims, all unsecured notes.
Are these corporate issuers, US municipal issues, sovereign issuers? You should probably give us an example, since it's a pretty broad question. In case of corporates, the two main reasons could be different SPV issuing (for example, most banks have AAA entities that are, supposedly, isolated in case of default) or could be the same legal entity, but the bonds sit in different parts of the credit structure (for example, senior secured and senior unsecured). Huh? Yes, the rating reflects both probability of default and expected losses in case of default. However, it has zero actual influence on the priority of claims. The rating is simply an opinion of the rating company and has no bearing on the actual life (as the GFC has shown us).
I have read it and (more importantly) I have co-managed sizeable cap structure arb positions through defaults and restructurings. Unlike the theory, it's complicated, confusing and the outcomes are usually very different everyone involved. What do you think happens in real life when the event is actually triggered?
after switching side, i had an average 2b loan warehouse go into different rating process each quarter.
Ok, so both of us have experience in the industry. We are talking about a very specific question which is "does the rating have any bearing on the recovery?" From my experience the actual recovery significantly differs from the projections. Granted, it's been quite a few years and my sample is limited, but I recall only one case where there were no structural surprises out of maybe 20 defaults the book has seen. It's probably worse now, since mucking around the default process is big part of edge for distressed credit funds - re-doming defaulting entities, shifting recovery assets around, etc. PS. btw, not taking shit like it's common on this site, you actually raised an interesting question about role of rating agencies in the actual lifecycle
op's question is simply, why one issuer can issue bonds at different ratings, financial being equal, only the priority of claims that matter legally. lower tranche has no claim until the upper one is fully recovered, if any.
Hmm. Maybe I misunderstood what he's saying, but it seems to me that he's also asking "is it safe to buy lower-rated bonds from the same issuer?" or something like that. My point is that it's complicated.