What it is:
Negative watch is a status that credit-ratings agencies assign to companies that might receive a lower credit rating in the future.
How it works (Example):
Moody's, Standard & Poor's, and Fitch's are the three primary credit ratings agencies in the United States. Similar to TransUnion, Equifax, or Experian -- agencies that evaluate individual borrowers' creditworthiness -- they evaluate companies, countries, states, and other entities and assign a creditworthiness rating. These evaluations involve reviewing a company's competitive environment, regulatory changes, and of course financial performance and management ability.
When the ratings agency has concerns about a company in light of its current rating but wants to take some time to see how the company performs before changing the company's credit rating, it puts the company on negative watch.
Why it Matters:
When a ratings agency lowers a company's credit rating, it is indicating that the company is less financially stable with regard to its creditors and thus is riskier. Accordingly, rating downgrades are generally not good news for a company's shareholders and lenders. In particular, the company will probably have to pay higher interest rates on current or future debt and may have trouble obtaining or maintaining its current financing vehicles. For this reason, being placed on negative watch is generally a predecessor to receiving a lower credit rating, which is why many investors consider it a "shot over the bow" in terms of future events.