Aswath Damodaran 346
Interest Coverage ratios, ratings and Operating income
Long Term Interest Coverage Ratio Rating is Spread is Operating Income Decline
< 0. 05 D 16. 00 % - 50. 00 %
0. 05 – 0. 10 C 14. 00 % - 40. 00 %
0. 10 – 0. 20 CC 12. 50 % - 40. 00 %
0. 20 - 0. 30 CCC 10. 50 % - 40. 00 %
0. 30 – 0. 40 B- 6. 25 % - 25. 00 %
0. 40 – 0. 50 B 6. 00 % - 20. 00 %
0. 50 – 0. 60 B+ 5. 75 % - 20. 00 %
0. 60 – 0. 75 BB 4. 75 % - 20. 00 %
0. 75 – 0. 90 BB+ 4. 25 % - 20. 00 %
0. 90 – 1. 20 BBB 2. 00 % - 20. 00 %
1. 20 – 1. 50 A- 1. 50 % - 17. 50 %
1. 50 – 2. 00 A 1. 40 % - 15. 00 %
2. 00 – 2. 50 A+ 1. 25 % - 10. 00 %
2. 50 – 3. 00 AA 0. 90 % - 5. 00 %
> 3. 00 AAA 0. 70 % 0. 00 %
These numbers were obtained by looking at banks in the United States. The
percentage drop in operating income as the rating changes is obtained by
looking at the operating income of banks whose ratings have dropped in the
year after the change. Below BBB, this data was not available (since banks tend
to be taken over by the FDIC when they get that risky). We set the operating
income drop to be large enough to prevent any bank from having an optimal
below BBB.
