DBRS Downgrades Republic of Argentina to CC

DBRS, Inc. (DBRS) has downgraded Argentina’s long-term foreign currency issuer rating from CCC (high) to CC. The long-term local currency issuer rating has been confirmed at B (low), and the short-term local and foreign currency ratings have been confirmed at R-5. The long-term foreign and local currency ratings have been placed Under Review Negative (URN). The trend on the short-term ratings remains Stable.

The downgrade of Argentina’s long-term foreign currency rating was triggered by the Supreme Court’s June 16 decision to reject Argentina’s appeal of the New York Southern District Court ruling, and by the Argentine government’s response to the ruling. As noted in DBRS’ last report on the Republic of Argentina, published on 24 February 2014, the lower court ruling effectively compels Argentina to choose between paying holdout bondholders and ceasing payments on its exchange bonds issued under New York law. DBRS ratings apply to these performing exchange bonds.

Given the uncertainty regarding the government’s next course of action, the long-term ratings have been placed under review (URN). DBRS expects to resolve the URN by end-July, by the expiration of the 30-day grace period on Argentina’s June 30 interest payments. Any course of action short of reaching a prompt settlement with the holdouts appears virtually guaranteed to trigger a selective default on Argentina’s exchange bonds issued under New York law.

The government of Argentina has reiterated its willingness to honor debts owed to holders of bonds issued in its 2005 and 2010 debt exchanges. The government has also made recent progress in normalizing relations with other creditors as well, reaching an agreement on a rescheduling of its obligations to the Paris Club official creditors in May. Nonetheless, the Argentine government has insisted that paying NML would be unfair to Argentina and its other creditors. Given current reserve levels and the additional creditors that would seek similar treatment, the government is also concerned about macroeconomic and financial implications of complying with the orders.

On June 17, the Minister of Finance announced plans to proceed with a new debt exchange that could allow holders of New York law exchange bonds to accept local law bonds and receive payment in Buenos Aires, thus attempting to circumvent the U.S. financial system and the effects of the court ruling. On June 18, the district court lifted the stay on enforcement of its February 2012 orders. This is likely to imply that the government will not make the upcoming June 30 interest payments on its New York law bonds, since any payments made on the bonds could be attached by the plaintiffs in satisfaction of their claims. Representatives of NML have emphasized their willingness to accept a settlement involving bonds, possibly modeled after the recent Repsol settlement and Paris Club deal. Despite the limited alternatives, whether the government will respond to this proposal remains unclear.

DBRS believes that Argentina will continue making scheduled payments on local law bonds, including those denominated in U.S. dollars. However, DBRS believes that the technical difficulties associated with the government’s proposed exchange are likely, at a minimum, to result in extensive delays. It will be virtually impossible to obtain 100% participation before interest payments come due on the outstanding New York law bonds. Furthermore, the terms of the exchange are likely to be viewed as coercive, given the explicit threat of non-payment. The government has not made any indication as to whether participants in the new exchange will be compensated for the increased liquidity, legal and other risks associated with local law bonds.

DBRS would likely change Argentina’s long-term foreign currency rating to Selective Default (SD) in the event of missed interest payments on any outstanding bonds. Completion of a successful exchange could also trigger a default. Conversely, if a resolution is found to the dispute between NML and the government, DBRS is likely to raise the rating to at least CCC. Macroeconomic, fiscal and external developments could also have an impact on Argentina’s ratings, as discussed in DBRS’ February 2014 report. Notwithstanding some progress in curbing monetary growth, DBRS believes that a failure to address growing fiscal imbalances is likely to further jeopardize macroeconomic stability. Currency and reserve pressures appear likely to resurface in coming months, as export receipts decline.

Notes:
All figures are in Argentine pesos (ARS) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include Ministry of Economy and Finance, Central Bank of the Republic of Argentina, INDEC, San Luis Province, Congress of Argentina, BIS, IMF, UN, World Bank, U.S. Court of Appeals for the Second Circuit (New York), United States District Court for the Southern District of New York, and various private sector analysts. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Thomas R. Torgerson
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 6 September 2007
Most Recent Rating Update: 18 February 2014