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Jamaica's domestic debt exchange treated as default
Published on February 13, 2013 Email To Friend    Print Version

NEW YORK, USA -- Standard & Poor's Ratings Services said on Tuesday that it has lowered its foreign and local currency sovereign credit ratings on Jamaica to 'selective default (SD)' from 'B-/B'. At the same time, it lowered its ratings on the bonds that are included in the country’s proposed domestic debt exchange to 'D'. It lowered the ratings on the government securities not included in the debt exchange to 'CCC'.

These rating actions follow the government's announcement on Monday of the domestic debt exchange and its official launch On Tuesday. The offer seeks to exchange Jamaica's domestically issued debt. It includes foreign currency-denominated debt that was issued locally, which carries foreign currency ratings, which is why S&P has lowered the foreign currency credit rating to 'SD'. This transaction excludes debt owed to nonresidents.

"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 fulfill its original obligations."

Jamaica undertook a similar debt exchange offer in January 2010, when S&P also revised its foreign and local currency sovereign credit ratings on Jamaica to 'SD'.

The government has announced its intention to seek an agreement with the International Monetary Fund, as part of a broad strategy of reforms designed to manage its debt burden and gain access to more external liquidity. Although such an agreement could ease short-term liquidity concerns, a sustained improvement in the government's financial profile will take many years, 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."

Despite the reduction in debt-servicing needs following the debt exchange, Jamaica's general government debt burden will remain high, at above 115% 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.
 
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