Editor’s note: Moody’s issued the following press release yesterday in relation to Argentina’s foreign-law sovereign obligations.
Moody’s Investors Service has today lowered the rating of Argentina’s foreign law bonds to Caa1. The downgrade reflects the increased default risk of these bonds deriving from ongoing legal proceedings in US courts, and differentiates this portion of Argentina’s debt from the rest.
As part of today’s action Moody’s affirmed Argentina’s B3 issuer rating, which applies to Argentina’s domestic legislation bonds, and affirmed the Ca rating on Argentina’s $6.3 billion of debt untendered in the 2005 and 2010 debt swaps that remains in default today. The outlook on all these ratings is negative.
Moody’s also affirmed Argentina’s B3 foreign currency bond ceiling, Caa1 foreign currency deposit ceiling, and the Ba3 local currency bond and deposit ceilings.
RATINGS RATIONALE
On October 26th 2012 the US Second Circuit Court of Appeals upheld a lower court ruling requiring the government of Argentina to pay litigating bondholders concurrently with any payments to holders of its restructured debt. The litigating bondholders, or holdouts, are investors that did not participate in Argentina’s 2005 or 2010 debt swaps. The litigating claims are US$ 1.3 billion, but could expand to almost US$ 12 billion if all holdout claims (US$ and EUR) can leverage the legal precedent -or US$ 7.5 billion if only NY law claims benefit. The appeals court wrote that bond documents’ pari passu language “prohibits Argentina, as bond issuer, from formally subordinating the bonds by issuing superior debt.” The court further ruled that as bond payer Argentina could not pay other bonds without paying litigating bondholders.
The legal case was sent back to the district court to clarify the formula to be used to pay both groups of bond holders, and whether – and how – the ruling impacts third parties involved in Argentina’s payments process, and then the case returned to the appeals court. On February 27 the appeals court held oral arguments on the case. On March 1 the court asked Argentina to propose a payment formula for holdouts, a proposal Argentina must submit by March 29.
While there are multiple possible legal outcomes to this case, we note two major credit scenarios:
1. The first results in a ruling that affirms litigant bondholder’s claims of full restitution, but provides no practical enforcement mechanism and therefore leaves restructured debt service unaffected, or that provides an alternative payment formula to litigating bondholders that Argentina’s government is willing to accept.
2. The second is any ruling that Argentina’s government refuses to abide by and that impacts payments to restructured debt bondholders. In this scenario payments to restructured debt bondholders are attached and/or Argentina chooses an alternative payment mechanism to avoid such attachments, resulting in delayed payments or net present value losses to investors in restructured debt.
Although Argentina has the financial means to meet any legal obligation to litigating bondholders, the government has repeatedly stated that it would not pay litigating bondholders in full. Today’s rating action reflects the risk that the final court ruling will result in some delay or loss to restructured foreign-law debt bondholders.
The issuer rating and domestic-legislation bond ratings remain B3 to reflect the fact that the majority of bonds outstanding are domestic legislation bonds and are expected to be unaffected by the final court ruling. Argentina’s B3 rating balances the country’s economic development and improved debt metrics with continuing concerns about the country’s policy mix and political volatility.
Argentina’s GDP per capita is more than three times the median of B-rated sovereigns, and its economy larger and more diversified than its peer group. The debt burden is similar to rating peers but is improving at a faster rate and we expect it will continue falling this year and next. But Argentina’s haphazard economic policy decisions coupled with increasing questions about the reliability of official statistics make it extremely difficult to know with certainty Argentina’s real economic conditions, raising questions about the country’s ability to manage adverse shocks.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody’s could consider moving the issuer rating outlook back to stable upon evidence that Argentina’s policy mix becomes more consistent and predictable. In particular, a resolution of either the Paris Club debt arrears or material improvements in the quality of official economic data would be considered credit positive for the rating.
Argentina’s foreign legislation bonds could potentially be upgraded back to the issuer rating if the final court ruling does not impact Argentina’s payments on its restructured debt.
A downgrade of the issuer rating could result if policy decisions end up negatively impacting the main economic and debt metrics. Additionally, a large and sustained deterioration of commodity prices, a persistent decline in international reserves and failure to make needed fiscal adjustments leading to a rise in the debt ratios, could also result in a lower rating. A further downgrade of Argentina’s foreign legislation debt could result if Argentina’s reaction to a final court ruling involves missed payments to restructured debt bondholders.
PREVIOUS RATING ACTION
Moody’s previous action affecting Argentina’s government bond rating was implemented on 17 September 2012, when the rating agency placed Argentina’s government bond ratings on negative outlook.
The principal methodology used in this rating was Sovereign Bond Ratings published on 9-Sep-2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.