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What do the DBRS ratings mean for preferred shares?

The rating definitions below have been taken directly from the DBRS website:

Pfd – 1            Preferred shares rated Pfd – 1 are of superior quality and are supported by entities with strong earnings and balance sheet characteristics. Pfd – 1 securities generally correspond with companies whose senior bonds are rated “AAA” or “AA” categories. As is the case with all rating categories, the relationship between senior debt ratings and preferred share ratings should be understood as one where senior debt ratings effectively sets the ceiling for the preferred shares issued by the corporation. However, there are instances where preferred share ratings can be lower than the normal relationship with the issuer’s senior debt rating.

Pfd – 2            Preferred shares rated Pfd – 2 are of satisfactory credit quality. Protection of dividends and principle is still substantial, but earnings, the balance sheet and the coverage ratios are not as strong as Pfd – 1 rated companies. Generally, Pfd – 2 ratings correspond with companies whose senior bonds are rated in the “A” category.

Pfd – 3            Preferred shares rated Pfd – 3 are of adequate credit quality. While protection of dividends and principal is still considered acceptable, the issuing entity is more susceptible to adverse conditions in financial and economic conditions, and there may be other adverse conditions present which detract from debt protection. Pfd – 3 ratings generally correspond with companies whose senior bonds are rated in the higher end of the “BBB” category.

Pfd – 4            Preferred shares rated Pfd – 4 are speculative, where the degree of protection afforded dividends and principal is uncertain, particularly during periods of economic adversity. Companies with preferred shares rated Pfd – 4 generally coincide with entities that have senior bond ratings ranging from the lower end of “BBB” category through the “BB” category.

Pfd – 5            Preferred shares rated Pfd – 5 are highly speculative and the ability of the entity to maintain timely dividend and principal payments in the future is highly uncertain. Entities with a Pfd – 5 rating generally have a senior bond ratings of “B” or lower. Preferred shares rated Pfd – 5 often have characteristics that, if not remedied, may lead to default.

D                     A security rated “D” implies the issuer has either not met a scheduled dividend or principal payment or the issuer has made it clear it will miss such a payment in the near future. In some cases, DBRS may not assign a “D” rating under a bankruptcy announcement scenario, as allowances for grace periods may exist in the underlying legal documentation. Once assigned, the “D” rating will continue as long as the missed payment continues to be in arrears, and until such time as the rating is suspended, discontinued, or reinstated by DBRS.

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