Do Credit Ratings measure severity of loss and default risk or only default risk?

[cfanewb92]

Can’t seem to find an answer in the Schweser. Do their ratings only measure default risk or do they measure both default risk and severity of loss?

 

[droox]

They measure only default risk = potential of the borrower to default (Investmante grade or Junk). Severity of loss depends on the recovery rate of the money invested : for example a borrower can issue bonds with different priority of claims(first lien , secured debt, senior unsecured etc.) if he defaults the recovery rate will be bigger for highest priority bonds => low severity of loss. In a extreme example junior subordinated debt could have 0 recovery rate .

 

[Joe_83]

when bonds have the same ratings then you look at severity of loss
the chances to default are the same with these bonds so you are looking at the Recovery Rate at which you might recover in the case of a loss for bonds rating equally

 

[droox]

Joe_83 wrote:
when bonds have the same ratings then you look at severity of loss
the chances to default are the same with these bonds so you are looking at the Recovery Rate at which you might recover in the case of a loss for bonds rating equally

Issuers default not bonds, I guess if a company defaults than all the debts/bonds issued by the company defaults and recovery rates are different - starting with highest priority to lowest. I might be wrong
Edit: I guess you’re right , I’m not sure if an entity issues more bonds it can default only on one of them