Downgrade

A downgrade is a reduction in the rating awarded a debt or equity security. A major credit agency downgrades the debt of a company or governmental entity when its financial situation deteriorates. The downgrade tells investors they are less certain to receive the interest payments and return of capital they are due. The downgrade usually has the effect of reducing the security's price and raising the issuer's cost of capital. A downgrade in the rating of a stock by a security analyst (e.g., buy, hold, sell) has more varied effects. If the downgrade is issued by a leading analyst who is known for forecasting moves in the stock's price, the downgrade can cause a major sell-off in the equity. If the analyst has a less stellar reputation, the downgrade may have little impact. Another key factor that determines the effect of a downgrade is whether the underlying analysis introduces important new information to the market -- or whether the reasons offered for the downgrade simply repeat management's own negative assessment of the company's prospects.

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