Greece is now in selective default according to S&P, which
just amended
its rating from CC (junk) to SD (selective default).
This comes after Greece instituted retroactive collective action clauses to
force bondholders to participate in an upcoming debt restructuring and
submitted
a formal offer for its creditors to participate in a bond swap last week.
The "selective default" designation differentiates what's happening right now
from disorderly default (or "D" rating), since the current debt restructuring is
being managed and guaranteed by other EU countries.
The move is primarily a technical one; private Greek bondholders are being
asked to voluntarily trade in their holdings of Greek bonds for ones with longer
maturities, but are now being forced to do so through a collective action clause
(CAC) that could make this restructuring obligatory.
Once the debt swap ends on March 12, S&P says, Greece's rating will
likely be raised again back to CCC—S&P's "forward-looking assessment of
Greece's creditworthiness."
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LONDON (Standard & Poor's) Feb. 27, 2012--Standard & Poor's Ratings
Services said today that it has lowered its 'CC' long-term and 'C' short-term
sovereign credit ratings on the Hellenic Republic (Greece) to 'SD' (selective
default).
Our recovery rating of '4' on Greece's foreign-currency issue ratings is
unchanged. Our country transfer and convertibility (T&C) assessment for
Greece, as for all other eurozone members, remains 'AAA'.
We lowered our sovereign credit ratings on Greece to 'SD' following the Greek
government's retroactive insertion of collective action clauses (CACs) in the
documentation of certain series of its sovereign debt on Feb. 23, 2012. The
effect of a CAC is to bind all bondholders of a particular series to amended
bond payment terms in the event that a predefined quorum of creditors has agreed
to do so. In our opinion, Greece's retroactive insertion of CACs materially
changes the original terms of the affected debt and constitutes the launch of
what we consider to be a distressed debt restructuring. Under our criteria,
either condition is grounds for us to lower our sovereign credit rating on
Greece to 'SD' and our ratings on the affected debt issues to 'D'.
As we have previously stated, we
may view an issuer's unilateral change of the original terms and conditions of
an obligation as a de facto restructuring and thus a default by Standard &
Poor's published definition (see
"Retroactive
Application Of Collective Action Clauses Would Constitute A Selective Default By
Greece," Feb. 10, 2012, and
"Rating
Implications Of Exchange Offers And Similar Restructurings, Update," May 12,
2009). Under our criteria, the definition of restructuring includes exchange
offers featuring the issuance of new debt with less-favorable terms than those
of the original issue without what we view to be adequate offsetting
compensation. Such less-favorable terms could include a reduced principal
amount, extended maturities, a lower coupon, a different payment currency,
different legal characteristics that affect debt service, or effective
subordination.
We do not generally view CACs (to
the extent that they are included in an original issuance) as changing a
government's incentive to pay its obligations in full and on time. However, we
believe that the retroactive insertion of CACs will diminish bondholders'
bargaining power in an upcoming debt exchange. Indeed, Greece
launched such an exchange offer on Feb. 24, 2012.
If the exchange is consummated (which we understand is scheduled to occur on
or about March 12, 2012), we will likely consider the selective default to be
cured and raise the sovereign credit rating on Greece to the 'CCC' category,
reflecting our forward-looking assessment of Greece's creditworthiness. In this
context, any potential upgrade to the 'CCC' category rating would inter alia
reflect our view of Greece's uncertain economic growth prospects and still large
government debt, even after the debt restructuring is concluded.
If a sufficient number of bondholders do not accept the exchange offer, we
believe that Greece would face an imminent outright payment default. This is
because of its lack of access to market funding and the likely unavailability of
additional official financing. The revised financial assistance program provided
by most of the eurozone governments and the Stand-By Credit Arrangement with the
International Monetary Fund are predicated on a successful exchange offer.
Our T&C assessment for
Greece, as for all other eurozone members, is 'AAA'. A T&C assessment
reflects our view of the likelihood of a sovereign restricting nonsovereign
access to foreign exchange needed to satisfy the nonsovereign's debt-service
obligations. Our T&C assessment for Greece expresses our view of the low
likelihood of the European
Central Bank restricting nonsovereign access to foreign currency needed for
debt servicing.
If Greece were to withdraw from eurozone membership (which is not our
base-case assumption) and introduce a new local currency, we would reevaluate
our T&C assessment on Greece to reflect our view of the likelihood of the
Greek sovereign and its central bank restricting nonsovereign access to foreign
exchange needed for debt service. Contrary to the current case, in this
scenario, the euro would be a foreign currency, and the Bank of Greece would no
longer be part of the European System of Central Banks. As a result, under our
criteria, the T&C assessment can be at most three notches above the
foreign-currency sovereign credit rating.
