investment grade

A lot of people calmly make the same mistake when they hear a company or country is 'raising a bond' with a juicy interest rate attached. They rush toward the fat number and never ask the one question that actually matters, which is whether the borrower is likely to pay back at all.

This is exactly what rating agencies exist to answer, and Investment Grade is their way of saying, in a language the whole financial world understands, that a borrower is unlikely to run away with your money. Agencies like Moody's, S&P and Fitch study a government or company's finances and give them a grade, much like a school report card. Anything from AAA down to BBB minus (or their equivalents) earns the label Investment Grade. Below that, you slide into what is politely called 'speculative grade' and less politely called 'junk'.

Nigeria's federal government bonds and most Nigerian corporate bonds are not Investment Grade by the big international agencies, which is one reason our government pays higher interest to attract foreign investors than, say, the UK government does when it issues gilts. The UK, with its long history of paying its debts, sits comfortably in Investment Grade territory, so its bonds pay lower interest because lenders sleep easy at night.

For an ordinary saver in Lagos or a Nigerian nurse in Leeds thinking of buying foreign bonds or bond funds, the grade tells you plainly how nervous you should be. An Investment Grade bond fund is the boring, reliable cousin at the family gathering. A junk bond fund is the cousin who always has a new business idea and sometimes it pays off spectacularly, sometimes it does not.

Grade is not destiny though. Agencies review and downgrade borrowers when circumstances change, so a company can slip out of Investment Grade if its finances turn bad, and that slip alone can make its bond prices fall as investors who are only allowed to hold Investment Grade paper are forced to sell.