UPDATE: S&P Cuts Argentina to 'CCC-'; Outlook Negative

On June 17, 2014, Standard & Poor's Ratings Services lowered its unsolicited long-term foreign currency rating on the Republic of Argentina (Argentina) to 'CCC-' from 'CCC+'. We affirmed the unsolicited short-term foreign currency rating at 'C'. At the same time, we affirmed our 'CCC+/C' unsolicited long-term and short-term local currency ratings on Argentina. The outlook on both long-term ratings is negative. We also changed our transfer and convertibility (T&C) assessment to 'CCC-' from 'CCC+'.

RATIONALE

The downgrade reflects the heightened risk of default on foreign currency debt following a recent decision by the U.S. Supreme Court not to hear the Argentine government's appeal against a previous decision by the U.S. Second Circuit Court of Appeals in favor of plaintiffs against the sovereign. The plaintiffs are bondholders who did not participate in the 2005 and 2010 debt exchanges and who have sought to block payments to bondholders who did participate until they obtain full payment on their claims.

On Aug. 23, 2013, the U.S. Second Circuit Court of Appeals upheld the ruling of a district court in New York in favor of the plaintiffs against Argentina. However, the Second Circuit Court of Appeals decided to keep a previously granted stay order, pending an appeal filed by Argentina with the U.S. Supreme Court. Following the Supreme Court decision, it is not clear when the lower court will lift its stay order, nor how it will specify a payment formula for the debt in default.

The Supreme Court decision raises the risk of payment interruptions on debt under New York law that is currently being serviced. Argentina has to make coupon payments for $225 million on performing bonds on June 30 (discount bonds denominated in U.S. dollars). Argentina is also scheduled to pay interest of $67 million on its New York jurisdiction Par bonds in September, followed by interest payments on its New York jurisdiction discount bonds in December. We would not consider continued nonpayment of holdout creditors as a default (as we have previously recorded this default, see Republic of Argentina," published Jan. 11, 2002, on RatingsDirect), but we would consider interruptions to debt that is currently being serviced as a new default.

In particular, we think that the Argentine government has limited capacity to pay the plaintiff creditors while servicing its current debt. The government could attempt to maintain payments on its currently performing debt through a mooted debt exchange--it could possibly tender for the 2005 and 2010 restructured bonds in an exchange that could replicate tenor, amount, and coupon but change the governing law and jurisdiction of payment to Argentina. We could view such an exchange as a distressed exchange, based on our criteria. Although neither is certain, a default or a distressed debt exchange pertaining to currently serviced debt appears to be inevitable within six months, in our view, absent unanticipated significantly favorable changes in Argentina's circumstances.

The affirmation of the local currency ratings reflects our view that the potential disruptions on payments resulting from adverse court rulings in the U.S. on foreign currency debt issued under New York law are not likely to affect the government's ability to service debt issued in local currency under local law.

We revised our T&C assessment for Argentina to 'CCC-' from 'CCC+'. The government already uses a variety of exchange controls, and there is a disparity between the official and parallel market exchange rates. Our 'CCC-' T&C assessment reflects the risk that the government could further tighten its exchange control regime to the extent that it impairs the ability of the private sector to service its foreign currency debt.

OUTLOOK

The negative outlook reflects the likelihood of a further downgrade based on possible payment interruptions or the announcement of what we could consider a distressed debt exchange. Either a payment interruption or a distressed debt exchange would lead us to lower our rating on Argentina to 'SD', indicating selective default.

We could revise the outlook on the long-term ratings to stable if threats to debt servicing were to unexpectedly diminish, combined with steps that boost external liquidity in order to meet substantial external debt amortization next year.

KEY STATISTICS

You May Also Be Interested In

• KeyBanc Reiterates Overweight Rating on Darden Restaurants (DRI)
• Barclays Starts Ligand Pharma (LGND) at Overweight
• Assured Guaranty commits $248M to Brightline Florida restructuring