Why might the Project Manager not accept the proposed bank or insurer issuing the bond?
A reason for not accepting the proposed bank or insurer is that its commercial position is not strong enough to carry the bond (see Clause X14.2).
Usually the credit rating of the bond provider will be specified. The rating is based upon a variety of factors, including the current strength of the issuer’s finances and its future business prospects, which allows a degree of confidence in the Bondsman’s ability to fulfill the obligations under the terms of the Bond.
There are three main credit rating agencies;
Standard & Poor’s,
Standard & Poor’s ranks bonds by placing them in a total of 22 categories, from AAA (highest) through AA (+ and -), A (+ and -), BBB (+ and -), BB (+ and -), B (+ and -), CCC (+ and -), CC, C and D (lowest).
Fitch largely matches the S&P bond credit ratings.
Moody’s employs a different naming convention.
The higher the Rating, the more expensive the cost of the Bond.
It is worth noting that the rating does not take account of external factors which may influence the Bondsman’s position, including; inflation and currency exchange rates.
Approximately half of all Bonds are issued under an A or BBB rating