S&P’s move on Jamaica suggests there’s pain ahead

August 6, 2009 sinistra 1 Comment

This is bad. S&P had previously assigned a rating of B- to Jamaica. In financial parlance, a B- rating sovereign rating suggests that the country is perceived as “high risk” by would-be lenders; in a word, “junk”.

By downgrading Jamaica to triple-C, S&P is saying the island is ” currently vulnerable and dependent on favorable economic conditions to meet its commitments.”

In other words, if economic conditions in Jamaica and the Caribbean get much worse, the country is going to have a hard time meeting its outstanding debts.

Here’s the statement from the rating agency:

Jamaica Downgraded To ‘CCC+’; Outlook Remains Negative

–Jamaica has a vulnerable fiscal profile and faces difficult financing conditions.

–We have lowered our long-term foreign and local currency ratings on Jamaica to ‘CCC+’ from ‘B-‘.

–The outlook remains negative, reflecting the possibility that the government may undertake a distressed debt exchange.

NEW YORK, Aug. 5, 2009–Standard & Poor’s Ratings Services said today it lowered its long-term foreign and domestic currency ratings on Jamaica to ‘CCC+’ from ‘B-‘. We kept the recovery rating at ‘4’. We also lowered the T&C assessment to ‘B’ from ‘B+’. The outlook on the ratings remains negative.

“The downgrade and the negative outlook reflect our view that Jamaica’s vulnerable fiscal profile, combined with difficult financing conditions, may compel the government to undertake a debt exchange that we could regard as a distressed debt exchange,” said Standard & Poor’s credit analyst Roberto Sifon Arevalo.

Jamaica’s fiscal accounts, which were already under pressure before the international financial crisis started last September, have deteriorated even further this year. We project the government borrowing requirement for the fiscal year 2009 (ending March 31, 2010) to be 20% of GDP. The debt profile is weak. Variable-rate domestic debt constitutes 58% of total domestic debt. One-quarter of total domestic debt matures within one year. One-half of gross government debt (external plus domestic) is foreign-currency denominated or foreign-exchange indexed. As a result, general government interest is estimated at 60% of 2009 government revenue, up from 48% in 2008.

“We project that gross general government debt will rise to 120% of GDP at fiscal year-end 2009,” said Mr. Sifon Arevalo. The vulnerabilities in the government’s debt profile may give it incentives to negotiate with its creditors, particularly its resident creditors, to extend maturities at below-market prices. In the government’s last debt issue, it placed two-year debt at a 21% coupon.

“While the government’s engagement with the IMF is a positive effort to stabilize external pressures and going forward to address the long-standing structural issues,” added Mr. Sifon Arevalo, “the negative outlook on the ratings signals the risk that a debt exchange, if undertaken by the government, could be an event of selective default under our distress debt exchange criteria.”

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Business & Finance, Trinidad & Tobago

Standard & Poor’s downgrades Sagicor Life Inc

July 28, 2009 sinistra Leave a comment

I tend to bang on about these rating agency downgrades, but they are important.

For those of you not familiar with these companies, their essence can be distilled thus: ratings agencies are arbiters of creditworthiness.

In other words, agencies like Moody’s, Standard & Poor’s and Fitch bestow upon companies and countries grades that indicate the likelihood that the rated entity will be able to pay its debts.

These ratings range from the gold standard – triple-A – which suggests the likelihood of default is minute, to Cs, which suggest the company or country poses a substantial risk to its creditors. The lowest grade – D – is reserved for those entities that have actually failed to pay their debts.

On that – last week, S&P lowered its rating Sagicor Life to BBB from BBB+, which is a one-notch downgrade. Here is the statement, highlighting and bracketed commentary is my own:

S&P: Sagicor Life Inc. Rating Downgraded To ‘BBB’ From ‘BBB+’; Outlook Stable

* Sagicor’s financial flexibility and liquidity could be under pressure if Jamaica’s economic environment continues to deteriorate.
* We are lowering our ratings on Sagicor, including lowering the long-term counterparty credit and financial strength ratings on the company to ‘BBB’ from ‘BBB+’.
* The outlook is stable.

MEXICO CITY July 24, 2009–Standard & Poor’s Ratings Services lowered its long-term counterparty credit and financial strength ratings on Sagicor Life Inc. to ‘BBB’ from ‘BBB+’. The outlook is stable.

At the same time, we lowered to ‘BBB-‘ from ‘BBB’ our rating on the long-term senior unsecured debt rating on the $150 million senior unsecured obligations with up to 10-year maturities issued by Sagicor Finance Ltd., a Cayman Islands-based subsidiary of Barbados-based Sagicor Financial Corp. Sagicor and Sagicor Financial Corp. irrevocably, unconditionally, and jointly guarantee these notes.

“The rating action reflects our opinion that a continued worsening in Jamaica’s economic conditions compromises Sagicor’s financial flexibility and liquidity,” said Standard & Poor’s credit analyst Alfonso J. Novelo. “Also, profits could be pressured as a result of poor conditions in the financial markets and the likelihood of a prolonged period of weaker-than-expected economic conditions in the main countries where the insurance company operates, in particular in Jamaica, where Sagicor has placed 27% of its financial investments.”

On June 10, 2009, we lowered our long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’; in addition, our rating on the Republic of Trinidad and Tobago, another one of the countries where Sagicor has a leading position, is on CreditWatch with negative implications. The U.S., the U.K., and other countries of operation are also facing economic challenges.

[In S&P speak, any country or company on “CreditWatch with negative implications” is likely to be downgraded in the very near future]

The counterparty credit and financial strength ratings reflect Sagicor’s strong operating performance, conservative underwriting discipline, good profitability, and strong capitalization. The ratings also reflect the company’s dominant market position as the leading life insurer in the Caribbean and its increasing geographic diversification.

These positive factors are partially offset by a relatively high concentration in revenues and investments in Jamaica, and the aggressive inorganic growth strategy the group has implemented in the past three years, somewhat mitigated by Sagicor’s long and successful track record in mergers and acquisitions.

The rating on the senior unsecured obligations reflects the subordination of the notes to obligations owed to policyholders and creditors of Sagicor’s subsidiaries.

The stable outlook incorporates our expectation that Sagicor will maintain extremely strong capitalization and good profits, even under the more challenging economic environment that the different countries where the group carries out business are experiencing.

We could lower the ratings if capitalization decreases dramatically, even if it remains at more than the 175% target, or if profits deteriorate substantially. Furthermore, ratings will be pressured in the case of negative rating actions on Barbados or Jamaica and the degree of a downgrade of Trinidad and Tobago.

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Business & Finance

S&P downgrades Barbados

June 10, 2009 sinistra Leave a comment

More bad news for Caribbean economies – rating agency Standard & Poor’s on Wednesday downgraded the foreign currency rating of Barbados to BBB from BBB+.

From the S&P statement, highlighting mine:

Barbados Foreign Currency Credit Rating Lowered To ‘BBB’ From ‘BBB+’; Outlook Stable

— The global economic crisis has pressured Barbados’ economic and fiscal performance and had a negative spillover effect on its sovereign debt trends.

— We are lowering our long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’.

— We expect the combination of prudent policymaking and strong, cohesive social policies will help Barbados through difficult economic times ahead, in line with its ‘BBB’ rated peers.

NEW YORK, June 10, 2009–Standard & Poor’s Ratings Services said today that it lowered its long-term foreign currency sovereign credit rating on Barbados to ‘BBB’ from ‘BBB+’. At the same time, we lowered our long-term local currency rating on Barbados to ‘BBB+’ from ‘A-‘, and the foreign currency short-term rating to ‘A-3’ from ‘A-2’, while the local currency short-term rating was affirmed at ‘A-2’. Our transfer and convertibility assessment was revised downward to ‘BBB+’ from ‘A-‘. The outlook is stable.

“As the global economic crisis spills over onto Barbados’ economic and fiscal future performance trends, the sovereign’s debt ratios, which already lag behind those of its ‘BBB+’ rated peers, will further diverge from the ‘BBB+’ median over the next few years, putting the country’s fundamentals and prospects more in line with ‘BBB’ rated sovereigns,” said Standard & Poor’s credit analyst Olga Kalinina.

We expect Barbados’ economy to contract by 2.5% in 2009, followed by a flat performance in 2010, before gradually recovering to a 2.5% growth in 2011. In the meantime, the government fiscal policy is countercyclical, resulting in the projected increase in debt levels to 86% of GDP (on a gross level) and 46% (on a net level) in 2009. Importantly, with lower revenues, servicing of the debt is becoming more expensive, as interest payments are expected to rise to 12% of revenues this year from 9% in 2007–the highest level among the rating peers.

The stable outlook reflects our expectation that the government’s limited policy choices, especially in light of the peg on the Barbadian dollar and the country’s already high debt levels, coupled with its commitment to address the debt situation, will result in the government tightening its fiscal accounts from 2010 onward. We believe this will lead to stabilization in the government’s debt levels. The strength of the country’s institutional and social arrangements, and its well-funded Social Security scheme (which provides significant fiscal deficit financing) afford Barbados the credit support and stability necessary for the current rating level.

On the external front, we will closely watch the trends in Barbados’ international reserve levels in order to identify any potential stress on its external liquidity position and currency peg. While the build-up in the government’s external sinking fund alleviates its short-term, external-debt servicing needs, the ratings could come under downward pressure if reserve losses were to come in higher than projected and strain the country’s already weak external liquidity ratios. Also of concern is the drop in the international reserves’ coverage of the monetary base to 83% in 2008 from 102% in 2007; this is expected to fall further to 74% in 2009.

“Our future ratings actions will take into account the magnitude of any deterioration in the country’s economic and fiscal metrics, including those related to the resolution of CLICO Holdings (Barbados) Ltd.’s issue, as well as the level of public support for the government’s necessary fiscal consolidation measures over the next year and beyond,” added Ms. Kalinina.

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The Liming House

S&P’s move on Jamaica suggests there’s pain ahead

Standard & Poor’s downgrades Sagicor Life Inc

S&P downgrades Barbados

"we brandish words like rapiers"