Downgrades

A downgrade is the act of reducing the rating, status, or level assigned to an entity, instrument, or program by an authoritative body. In finance, downgrades most often refer to lower credit ratings issued by agencies such as Standard & Poor’s, Moody’s, and Fitch. Downgrades can apply to sovereigns, corporations, financial institutions, and structured finance, and they are the opposite of upgrades.

In debt markets, a downgrade lowers the issuer’s credit rating and is interpreted as increased default or repayment risk. This typically raises a borrower’s cost of capital, tightens access to financing, and can shift investor demand away from the issuer’s notes or bonds. Downgrades may also trigger covenants, liquidity requirements, or automatic repricing in some secured financing arrangements. A downgrade can be one-notch or multiple notches and may move an issuer from investment grade toward high-yield status.

Causes of downgrades include weaker operating performance, higher leverage, deteriorating cash flow, adverse macroeconomic conditions, governance concerns, or new risks identified by the rating agency. Downgrades may be initiated by the agency on its own assessment or in response to a change in outlook, and they can be preceded by a watch or review period.

Process and market effects: rating agencies publish the rationale behind the downgrade, and other agencies may act independently or in coordination. Downgrades can influence market pricing, lead to index rebalancing, and prompt investors to adjust portfolios. For sovereign and corporate borrowers, downgrades often reflect broader risk appetite shifts and can have lasting effects on borrowing terms and fiscal policy.

Other uses: the term also extends beyond finance to describe moving to a lower tier or version in contexts such as service levels, software, or product plans.