S&P further downgrades Greece to CC long term rating and C short Term rating
Following review of the July 21 statement by the European Council (EC), Standard & Poor’s has concluded that the proposed restructuring, in the form of an exchange into discount or par bonds or a rollover into 30-year par bonds, of Greek government debt would amount to a selective default under our rating criteria.
In anticipation of the debt exchange, we have lowered the long-term rating on Greece to ‘CC’ and we have affirmed the ‘C’ short-term rating.
The outlook on the ratings is negative.
We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would–in the absence of debt relief–fail to pay its debt on time and in full.
While no exact date has been announced to initiate Greece’s debt restructuring, we understand that it will commence in September 2011 at the earliest.
Our recovery rating of ‘4’ for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.
On July 27, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the Hellenic Republic to ‘CC’ from ‘CCC’. At the same time we affirmed the short-term rating at ‘C’. The outlook is negative. Our recovery rating of ‘4’ for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders, including on those bonds subject to a 20% reduction in net present value (NPV) as estimated under the Institute for International Finance (IIF) proposal.
Following review of the European Council’s (EC’s) July 21 statement, Standard & Poor’s has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology. We view the proposed restructuring as a "distressed exchange" because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors. Moreover, the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default and to give the Greek government more time to undertake fiscal consolidation and policy reforms.
Under our criteria, we characterize a distressed borrower as one that would–in the absence of debt relief–fail to pay its debt on time and in full.
The restructuring proposal put forward by the IIF gives investors the option of exchanging either into discount or par bonds, or rolling over into 30-year par bonds.
In the debt exchange option, we understand that new, discount bonds would be offered in exchange for existing bonds at 80% of par and would pay investors effective interest rates of 7.17% and 7.69% on the 15-year and 30-year maturities, respectively.
Alternatively, investors could swap into 30-year bonds at par, which would pay an effective interest rate of 4.6%.
At the same time, the IIF is proposing a €40 billion debt buyback fund that would aim to repurchase Greek secondary market debt at an average discount of just under 40% of face value.
In our opinion, the terms of both the exchange and rollover options appear unfavorable to investors. The new debt instruments’ maturity would extend well beyond the maturity of bonds tendered in the proposed exchange and rollover options, and beyond what Greece could currently issue in the market. We assess the interest rate levels paid on the new bonds as significantly below rates available to buyers in the secondary market. As a consequence, we assess the restructuring as distressed, and we view the terms of the restructuring as offering less value than the promise of the original securities. Under our criteria, this leads us to conclude that the restructuring amounts to a selective default.
The purchase of Greek sovereign bonds in the secondary market one at a time would not be viewed by Standard & Poor’s as a selective default, as we would view these as transactions entered into voluntarily by both the buyer and the seller. Nevertheless, purchases of debt securities at large discounts to par are an indication of weakened issuer creditworthiness. Moreover, under Standard & Poor’s methodology, coordinated bond buybacks at fixed prices could be considered selective defaults. For these reasons, we are downgrading Greece’s long-term foreign currency rating to ‘CC.’
Our recovery rating of ‘4’ for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders after taking into account the 20% reduction in NPV likely to occur under the first round of restructuring, as estimated under the IIF proposal. Our recovery rating base-case default scenario for Greece continues to incorporate a second debt restructuring, including considerably higher principal "haircuts" on top of those proposed under the IIF exchange. Under the IIF’s accompanying exchange
proposal, some of the securities into which investors can swap will be collateralized with ‘AAA’ rated, zero-coupon bonds. In that case, we will assess if the recovery of principal on ‘AAA’ collateralized instruments could be significantly higher than that of senior unsecured Greek government bonds, which could then lead to higher issue ratings for the collateralized instruments. Nevertheless, our experience with similar arrangements, such as that for Brady bonds, suggests that the new securities may not be immune to
future restructuring and losses, and that recovery may not necessarily be higher than for that of unsecured securities.
Our country transfer and convertibility (T&C) assessment for Greece, as for all eurozone members, is ‘AAA’. A T&C assessment reflects Standard & Poor’s 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 reflects our view that the likelihood of the ECB restricting nonsovereign access to foreign currency needed for debt servicing is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy, and which we expect to remain the case in the future.
Should Greece exit the eurozone (which is not our base-case assumption) and introduce a new local currency, the T&C assessment would be reset 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, the euro would in this scenario be a foreign currency, and the Bank of Greece would no longer be part of the European System of Central Banks. Under our criteria, the T&C assessment can be at most three notches above the sovereign foreign currency rating. In most reasonable scenarios, Greek-domiciled holders of euros would likely continue to face no
restrictions in converting euros to dollars, Swiss francs, or other foreign currencies, the issue addressed by the current T&C assessment.
The outlook is negative. While no exact date has been announced to initiate Greece’s debt restructuring, we understand that it will commence in September 2011 at the earliest. Upon the announcement of the implementation of the restructuring, a downgrade to ‘SD’ (selective default) would likely occur. Should the exchange/rollover be initiated, Standard & Poor’s would expect to revise the rating on the specific obligation to ‘D’ (default) even if only a portion of the rated bonds is subject to the exchange offer. We would also likely revise the sovereign credit rating (the issuer credit rating) to ‘SD’.
On conclusion of the exchange and/or bond buybacks, we would likely raise the sovereign credit rating on Greece to a level commensurate with our forward-looking opinion on the likelihood of future defaults given Greece’s adjusted debt profile. If the exchange involves multiple separate transactions over several weeks or months, we would assign our ‘SD’ sovereign credit rating
to Greece on completion of the first repurchase. Subsequently, all other things being equal, we would likely raise our sovereign credit rating as early as a few days after completion of the first repurchase.
In our opinion, the likelihood of a future default on the new securities is likely to remain high. We anticipate that we would assign a
low-speculative-grade rating to Greece, given our view that Greece will likely continue to be burdened by high debt to GDP of just under 130% of GDP at end-2011 and uncertain growth prospects even after the debt restructuring is concluded.
Conversely, if the terms of the transactions do not result in a default under our criteria, and the Greek government complies with the revised EU/IMF program, our ratings on Greece could stabilize at the current ‘CC’ levels, even taking into account the risk of a debt restructuring in the form of a principal haircut by 2013.