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Fitch Downgrades Jamaica's Local Currency Ratings to 'C'
Outlook remains negative
Friday, January 15, 2010
Fitch Ratings yesterday downgraded Jamaica's long-term local currency rating to 'C' from 'CCC'. In addition, Fitch has affirmed Jamaica's long-term and short-term foreign currency ratings at 'CCC' and 'C' respectively, and affirmed the Country Ceiling at 'B-'. Jamaica's sovereign ratings Outlook remains Negative.
The downgrade to 'C' from 'CCC' follows yesterday's announcement of a domestic debt exchange by the government. Fitch believes that the exchange constitutes a coercive debt exchange (CDE) as outlined in Fitch's global criteria report, 'Coercive Debt Exchange Criteria', published March 3, 2009 and available on Fitch's web site at 'www.fitchratings.com'.
The affirmation of Jamaica's long-term foreign currency Issuer Default Rating (IDR) at 'CCC' reflects the fact that the exchange offer does not include government debt securities issued in international capital markets.
The government's debt exchange offer involves approximately J$701 billion of domestic debt securities, virtually all its outstanding domestic debt. 'The debt exchange, if successful, will substantially reduce the government's near-term debt service costs and create the fiscal space for public finance and economic reform as well as unlock support from the IMF and other multilateral creditors,' said Shelly Shetty, Senior Director in Fitch's Sovereign Group.
In Fitch's view, the proposed debt exchange does imply an adverse change in the terms of government domestic debt even though, if successful, it will materially reduce the risk of a disorderly sovereign debt default.
The exchange extends the maturity and simultaneously reduces the yield on domestic government debt securities. Moreover, the exchange offer is against the backdrop of increasing government financial distress and an unsustainable public debt service burden. Consequently and according to Fitch's criteria, the exchange offer constitutes a 'coercive debt exchange' even though it is notionally 'voluntary', no principal loss is implied and some features of the new instruments are favorable for creditors. Jamaica's local currency IDR rating will be downgraded to Restricted Default ('RD') once
Fitch judges that the exchange has been executed, likely to be on or very shortly after the expiration date of the offer. Jamaica's local currency rating will subsequently be raised out of default shortly after Fitch determines that the exchange has been successful involving a participation rate of typically 90%. In the event that the successful conclusion of the exchange is followed by approval of an IMF program in support of the government's fiscal and economic program, Jamaica's ratings will likely be raised into the single 'B' category.
Under the proposed exchange, the coupons will be significantly lower and maturities will be extended. The consolidation of over 350 securities into 23 new benchmark bonds, the conversion of some securities from callable to non-callable and the introduction of inflation-indexed bonds are positive for domestic creditors and the overall development of the local bond market. Fitch also believes that the proposed domestic debt exchange is unlikely to materially undermine the solvency of the banking sector, though the lower yield on the new securities will adversely affect near-term profitability
Outlook remains negative
Friday, January 15, 2010
Fitch Ratings yesterday downgraded Jamaica's long-term local currency rating to 'C' from 'CCC'. In addition, Fitch has affirmed Jamaica's long-term and short-term foreign currency ratings at 'CCC' and 'C' respectively, and affirmed the Country Ceiling at 'B-'. Jamaica's sovereign ratings Outlook remains Negative.
The downgrade to 'C' from 'CCC' follows yesterday's announcement of a domestic debt exchange by the government. Fitch believes that the exchange constitutes a coercive debt exchange (CDE) as outlined in Fitch's global criteria report, 'Coercive Debt Exchange Criteria', published March 3, 2009 and available on Fitch's web site at 'www.fitchratings.com'.
The affirmation of Jamaica's long-term foreign currency Issuer Default Rating (IDR) at 'CCC' reflects the fact that the exchange offer does not include government debt securities issued in international capital markets.
The government's debt exchange offer involves approximately J$701 billion of domestic debt securities, virtually all its outstanding domestic debt. 'The debt exchange, if successful, will substantially reduce the government's near-term debt service costs and create the fiscal space for public finance and economic reform as well as unlock support from the IMF and other multilateral creditors,' said Shelly Shetty, Senior Director in Fitch's Sovereign Group.
In Fitch's view, the proposed debt exchange does imply an adverse change in the terms of government domestic debt even though, if successful, it will materially reduce the risk of a disorderly sovereign debt default.
The exchange extends the maturity and simultaneously reduces the yield on domestic government debt securities. Moreover, the exchange offer is against the backdrop of increasing government financial distress and an unsustainable public debt service burden. Consequently and according to Fitch's criteria, the exchange offer constitutes a 'coercive debt exchange' even though it is notionally 'voluntary', no principal loss is implied and some features of the new instruments are favorable for creditors. Jamaica's local currency IDR rating will be downgraded to Restricted Default ('RD') once
Fitch judges that the exchange has been executed, likely to be on or very shortly after the expiration date of the offer. Jamaica's local currency rating will subsequently be raised out of default shortly after Fitch determines that the exchange has been successful involving a participation rate of typically 90%. In the event that the successful conclusion of the exchange is followed by approval of an IMF program in support of the government's fiscal and economic program, Jamaica's ratings will likely be raised into the single 'B' category.
Under the proposed exchange, the coupons will be significantly lower and maturities will be extended. The consolidation of over 350 securities into 23 new benchmark bonds, the conversion of some securities from callable to non-callable and the introduction of inflation-indexed bonds are positive for domestic creditors and the overall development of the local bond market. Fitch also believes that the proposed domestic debt exchange is unlikely to materially undermine the solvency of the banking sector, though the lower yield on the new securities will adversely affect near-term profitability
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