What is a Shadow Rating?

A shadow rating is a type of credit rating that aids companies in determining how well a proposed debt issue would appeal to investors, should that issue be released into the marketplace. This rating is normally prepared by a recognized credit agency, but is not made available to potential investors. Businesses will often utilize this resource when gauging whether or not a bond or other debt issue is likely to achieve the desired purpose. This rating may also come in handy in helping a company decide when to issue the bond, based on current economic circumstances and prevailing market conditions.

The shadow rating is also utilized as a means of evaluating bonds that are not eligible for trading in a secondary market. In this instance, the bond rating is often conducted by Standard & Poor, with the S&P rating made available to the issuer. The credit rating is in turn made available to prospective investors who have expressed some interest in the bond issue.

Based on the results of a shadow rating, the bond issue may be abandoned or simply delayed for a period of time. In situations where the underlying reasons for the rating indicate that investors are less likely to purchase the debt issue under the current economic climate, delaying the release of the bond until that climate changes may be deemed in the best interests of the issuer over the long-term. Should the results indicate that the bond issue is likely to generate less than sufficient interest regardless of the general state of the economy, the issuer may choose to rework the bond before moving forward with the issue, or possibly decide to pursue some other means of generating income.

While a shadow rating is not reported to the general public at the time it is prepared, the bond issuer may choose to make the information public at a later date. This sometimes occurs once the decision has been made to move forward with the issue of the bond, and the issuer believes that revealing the rating will have a positive effect on the response of investors to the new bond. For example, if the shadow rating for a given bond was very favorable, the issuer may choose to share the information in a public setting in order to call attention to that rating. This is especially true if the rating service or agency that evaluated the bond is highly respected among investors.