DBRS Downgrades Republic of Argentina to Selective Default

DBRS, Inc. (DBRS) has downgraded Argentina’s long-term foreign currency issuer rating from CC to Selective Default (SD). The short-term foreign currency rating has been downgraded to Default (D), from R-5. The long-term and short-term local currency issuer ratings have been confirmed at B (low) and R-5, respectively. The trend on the long-term local currency rating is Negative, and the trend on the short-term local currency rating is Stable.

The 30 day grace period for paying interest due on some of Argentina’s exchange bonds expired on July 30. Although Argentina attempted to make the payment to the trustee (Bank of New York-Mellon) at the end of June, the New York District Court ruling effectively barred the trustee from executing the payment to exchange bondholders, resulting in a default on those securities. The court’s ruling was an attempt to force Argentina to negotiate a settlement with holdout bondholders and bring a long-running legal dispute to an end. However, Argentina has thus far remained unwilling to grant holdout creditors more favorable terms than those extended to participants in the 2005 and 2010 debt exchanges. At this stage, only some of Argentina’s outstanding foreign currency bonds have been affected by the default. Although a failure to resolve the dispute with holdout creditors could eventually affect all bonds issued under foreign law, DBRS is presently treating this as a Selective Default on long-term foreign currency debt.

DBRS believes that Argentina will continue making scheduled payments on local law bonds, including those denominated in U.S. dollars. However, a prolonged period of default on foreign law bonds could have adverse implications for macroeconomic stability, potentially resulting in increased capital flight. DBRS believes that policy measures to restore price stability have thus far been inadequate. Consequently, the trend on the long-term local currency rating remains Negative.

Argentina’s default could be cured quickly, either by means of a settlement with holdout bondholders or through some other mediated solution that allows interest payments on performing debt to resume. If a resolution is found, DBRS is likely to raise the foreign currency ratings. However, in the absence of such an agreement and particularly in the event of acceleration of Argentina’s foreign-law bonds, Argentina could remain in default for a considerable period of time.

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: 20 June 2014