Credit quality floor

A credit quality floor sets the lowest rating a policy accepts. It takes two main forms: every bond rated at least BBB-, or no more than 10% rated below BBB-. A third form sets an average, such as average quality of at least A-.

Before a floor can be tested, the policy must settle four points:

• which agencies count;
• how a split rating is resolved;
• whether a negative watch lowers the grade;
• how an unrated security is treated.

One sample US policy settles the second in a phrase: the lower rating applies. Others leave the points open.

Acclimetry’s credit quality floor measures the weight of holdings whose composite grade is worse than the minimum. The organisation’s split-rating, watch and unrated policy decides the composite. Example: with a BBB- floor and a 10% cap, a BB+ holding worth 200 of a 1,000 portfolio is 20%, a breach.