Argentina’s credit rating was cut one level by Standard & Poor’s, which cited a U.S. Appeals Court ruling that prevents the country from honoring its debt without also paying holders of defaulted bonds in full.
S&P lowered the country’s rating to CCC+, seven levels below investment grade and in line with that of Egypt and Cyprus, from B-, according to an e-mailed statement today. S&P gave the rating a negative outlook.
“The lawsuit could result in the interruption of payments on bonds currently under New York jurisdiction, or it could prompt Argentina to undertake a debt exchange that we could view as distressed,” S&P said in the statement. “There is at least a one-in-three chance of either occurring within the coming 12 months.”
The court said Aug. 23 that Argentina can’t make payments on its restructured debt while refusing to pay holders of $1.5 billion in defaulted notes including hedge fund Elliott Management Corp. The ruling will also prevent third parties, including trustee Bank of New York Mellon Corp., from passing along payments to bondholders. PresidentCristina Fernandez de Kirchner said Aug. 26 that Argentina will offer a third restructuring to defaulted bondholders and let investors who own the restructured notes swap them into debt subject to local law.
The perceived risk Argentina will default on its obligations is the highest of any country in the world, according to credit-default swaps. Argentina’s five-year swaps, contracts that protect the nation’s bondholders against non-payment, have jumped 52 basis points, or 0.52 percentage point, since the ruling to 2,534 basis points at 6 p.m. in New York, according to data compiled by CMA Ltd.
Yields on sovereign securities last year moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg published in December.
Economy Minister Hernan Lorenzino said on Aug. 28 any plan to swap the restructured securities would be explored once the U.S. Supreme Court decides whether to hear Argentina’s appeal against the holdouts. Since then, restructured dollar bonds due 2033 have rallied 2.46 cents on the dollar to 61.4 cents, according to data compiled by Bloomberg.
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