Notching Explanation

Notching refers to the practice of adjusting credit ratings for different classes of debt from the same issuer based on their relative seniority in the capital structure.

Senior unsecured debt typically serves as the base rating or anchor rating for an issuer. This is because:

1. Senior unsecured debt represents the most common form of corporate debt
2. It sits in the middle of the capital structure hierarchy
3. It provides a reference point for rating other debt instruments

From this base rating:

• Senior secured debt is typically notched up (higher rating) due to collateral protection
• Subordinated debt is typically notched down (lower rating) due to lower priority in bankruptcy

The notching adjustments reflect the different recovery prospects for each debt class in the event of default, with senior unsecured serving as the baseline reference point.