BOTH Fitch and Standard and Poor's (S&P) lower Jamaica's credit ratings on account of the proposed debt swap, which opens today.
S&P called the National Debt Exchange (NDX), which seeks to lower debt costs, an outright default, while Fitch said it would constitute a distressed debt exchange (DDE).
We consider the debt exchange as a default for two main reasons, as described in our criteria, "Rating Implications Of Exchange Offers And Similar Restructurings, Update," published May 12, 2009, said a release from S&P.
"In our view, the offer implies that investors will receive less value than promised as per the original securities based on the lower interest rate and maturity extension — an average increase of five years," said Standard & Poor's credit analyst Joydeep Mukherji. "We view this offer as distressed rather than opportunistic, because the issuer does not intend to fulfil its original obligations."
Jamaica undertook a similar debt exchange offer in January 2010, when we also revised our foreign and local currency sovereign credit ratings on Jamaica to selected default (SD), according to S&P.
Although such an agreement could ease short-term liquidity concerns, a sustained improvement in the Government's financial profile will take many years, in S&P's view, because of the country's structural economic weaknesses.
"We expect to assign a new sovereign credit rating in the 'CCC' category to the new bonds upon the completion of the debt exchange and the issuance of the new bonds, which is scheduled for later this month," said Mukherji. "A high debt burden and weak external liquidity position will constrain the new sovereign rating after the debt exchange is completed."
Fitch plans to assign a restricted default (RD) ratings on the new notes.
Despite the reduction in debt-servicing needs following the debt exchange, Jamaica's general government debt burden will remain high, at above 115 per cent of GDP in 2013. Moreover, its net international reserves were approximately $1 billion at the end of January, down from more than $1.9 billion at the beginning of 2012. Low external reserves, along with low prospects for GDP growth, will constrain the new sovereign rating.
"The proposed debt exchange will affect some instruments to which Fitch's FC IDR (issue a default rating) applies," said Fitch. "As a result, both the sovereign foreign currency and local currency IDRs have been lowered to 'C' from 'B-' indicating that default on both types of debt instruments is highly likely in the near term."
It went on to say that although the operation did not involve a 'haircut' on principal, "the proposed exchange does imply an adverse change in the terms of government domestic debt".
Both agencies also lowered the ratings on the government securities not included in the debt exchange to 'CCC'.
"Although the operation does not directly involve international bonds, Fitch has lowered the rating on Jamaican Eurobonds to 'CCC', as an unsuccessful debt exchange could result in increased financing pressures for the sovereign," said the ratings agency.
However, "Jamaica's ratings will be raised out of default shortly after Fitch determines that the exchange has been successful, which is typically measured by a minimum participation rate of 90 per cent."