A sovereign's credit rating generally represents the highest attainable rating by most issuers domiciled within their respective country. In this paper I show that through the sovereign ceiling channel, credit ratings have an important effect on a firm's cost of debt. Specifically, I estimate the differential effect of contractions and relaxations in the sovereign ceiling on the bond spreads of firms that are exactly at the sovereign bound, relative to other firms that are near but not at the bound. I find that following a sovereign downgrade, the spread of bound firms increases by approximately 54 basis points more relative to issuers that are near but not bound by the sovereign ceiling. I also show that firms that are at the bound tend to be rated more unfavorably and their predicted probabilities of default tend to be lower relative to non-bound firms. These results are consistent with the hypothesis that the sovereign ceiling represents a meaningful institutional friction, and that through this channel credit ratings have an important effect on borrowing costs in the private sector.