The Liming House

Good to see you again. Glad you enjoy the Limes.

A not unexpected move from Standard & Poor’s, which has been deeply negative on Jamaica for some time now. Rival rating agency Fitch issued a similar downgrade, cutting the island’s local currency rating to ‘C’ from ‘CCC” on Thursday.

It’s not all bad news though – the debt exchange that triggered the rating actions will significantly improve Jamaica’s fiscal footing, and affects virtually all of the country’s J$ denominated outstanding debt.

And as an IMF official quoted by Reuters pointed out, the country is likely to have its ratings *upgraded* once the exchange has been successfully completed – as defined by rating agency criteria.

Here’s a line from Fitch on the prospect of an upgrade:

“In the event that the successful conclusion of the upgrade is followed by approval of an IMF program in support of the government’s fiscal and economic program, Jamaica’s ratings will likely be raised into the single ‘B’ category.”

According to the anonymous IMF official, S&P had also “acknowledged they would raise Jamaica’s credit rating by a number of notchratingses once the debt restructuring was complated,” Reuters said.

The S&P statement:

Jamaica has announced a domestic debt exchange program that officially launches today.

We consider this exchange to constitute a default, so we have revised the foreign- and local-currency sovereign credit ratings on Jamaica to ‘SD’ from ‘CCC/C’ and the ratings on the exchanged bonds to ‘D’.

NEW YORK, Jan. 14, 2010–Standard & Poor’s Ratings Services said today that it revised its foreign- and local-currency sovereign credit ratings on Jamaica to ‘SD’ from ‘CCC/C’.

Standard & Poor’s also said that it revised its ratings on the rated bonds that are included the sovereign’ proposed domestic debt exchange to ‘D’.

The ratings on the government securities not included in the debt exchange remain at ‘CCC’. The recovery rating remains at ‘4′.

…

“These rating actions follow Jamaican Prime Minister Golding’s announcement yesterday of the domestic debt exchange and its official launch today,” explained Standard & Poor’s credit analyst Roberto Sifon Arevalo. The offer seeks to exchange all categories of the Jamaican domestic debt except Treasury bills. It does include foreign-currency-denominated domestic debt, which carries foreign-currency ratings, which is why we have revised the foreign-currency credit rating to ‘SD’. External debt is excluded from this transaction

“Overall, the domestic efforts, together with the ongoing multilateral support, should help Jamaica manage its long-standing fiscal and structural problems going forward,” Mr. Sifon Arevalo added. “In this context, we expect to assign a ‘B-’ sovereign credit rating and ‘B-’ debt ratings to the new bonds upon the completion of the debt restructuring and issuance of the new bonds, which is scheduled for Feb. 16, 2010.”

Other Jamaica-related limes are available in the archives.

Hot on the heels of the decision by Standard & Poor’s to slash Jamaica’s sovereign rating comes this announcement from the rating agency:

S&P: National Commercial Bank Jamaica Counterparty Credit Rating Lowered To ‘CCC’; Survivability Assessment Lowered To ‘B’

* On Nov. 2, 2009, we lowered the long-term sovereign rating on Jamaica to ‘CCC’ from ‘CCC+’.
* We are lowering our ratings on NCB, including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. We are also lowering our survivability assessment on NCB to ‘B’ from ‘B+’.
* The outlook on NCB remains negative, mirroring that on Jamaica, as a result of the bank’s concentration in government debt securities and loans to public entities in the country.

MEXICO CITY Nov. 4, 2009–Standard & Poor’s Ratings Services said today that it lowered its ratings on National Commercial Bank Jamaica Ltd. (NCB), including the long-term counterparty credit rating, to ‘CCC’ from ‘CCC+’. At the same time, we lowered our survivability assessment on NCB to ‘B’ from ‘B+’, as assigned on Aug. 6, 2009. The outlook is negative.

[In rating agency speak, the survivability assessment is "a current opinion on the likelihood that over the medium-term, a bank will either directly or through a successor organization, remain in operation, regardless of whether it is solvent or insolvent, paying all of its obligations on a timely basis or not."

Moreover: "A relatively low survivability assessment does not constitute an opinion by Standard & Poor's that a particular bank is likely to fail; rather it indicates a vulnerability to adverse circumstances which could affect the bank's ability to meet its financial obligations on a timely basis, without special circumstances which would clearly enhance the likelihood that it would continue to operate in such an event. "

And here's what S&P means by a "B" rating in this area: "A bank with a survivability assessment of 'B' is VULNERABLE. Adverse business, financial or economic conditions will likely impair the bank's ability to maintain operations in which case the bank may become subject to regulatory intervention."]

The rating action followed the downgrade of the long-term sovereign credit rating on Jamaica (CCC/Negative/C) to ‘CCC’ from ‘CCC+’.

“NCB has a very large exposure to Jamaican sovereign-debt securities and loans to public entities,” said Standard & Poor’s credit analyst Alfredo Calvo. “Also, Jamaica’s deteriorating economic situation and the more-challenging conditions for the Jamaican banking system will continue to pressure the financial performance of the bank.”

The action on the survivability assessment was based on the downgrade of NCB and our view that vulnerabilities in the government’s debt profile have grown significantly from previous years, narrowing the government’s capacity to support the bank in times of stress.

However, we are still maintaining our survivability assessment at three notches higher than the counterparty credit rating on NCB. This reflects our continuing expectation that the government could give certain assistance to the bank if needed because of NCB’s significant market share in the country, adequate financial performance, and large branch network and deposit base.

If the liquidity and market share of the bank shrink significantly, we could further adjust our survivability assessment.

The ratings on NCB are limited by the bank’s large exposure to Jamaica’s government; greater loan concentration than peers; operation within a relatively small and nondiversified economy with high debt; and the more challenging environment for the Jamaican banking system.

However, the bank’s leading market presence in the Jamaican banking system, adequate but pressured performance under more-challenging conditions, and consistent improvements in its operating performance support the rating.

My day job has kept me so busy I haven’t yet had time to read beyond the headlines of the latest budget, but it seems that whatever Karen Nunez-Tesheira put together pleased Standard & Poor’s. Although the devil, as ever, is in the details.

The rating agency issued the following statement on Monday (any emphasis mine, as are the bracketed comments):

Republic of Trinidad and Tobago Ratings Taken Off CreditWatch And Affirmed; Outlook Stable

(CreditWatch negative is ratings agency speak for “we’re concerned about this country, and we may lower our rating on it in the not-too-distant future, unless its economics improves)

–Although Trinidad and Tobago’s bailout of the CL Financial Group could cost up to 6% of expected 2009 GDP, its solid fiscal and external position support its policy flexibility.

–In addition, the government’s debt profile and burden limit external vulnerabilities.

–As a result, we have taken the ratings off CreditWatch negative, affirmed them, and assigned a stable outlook.

NEW YORK, Sept. 14, 2009–Standard & Poor’s Ratings Services said today that it affirmed its ‘A/A-1′ foreign-currency and ‘A+/A-1′ local-currency sovereign credit ratings on the Republic of Trinidad and Tobago. Standard & Poor’s also said that it removed these ratings from CreditWatch, where they were placed on Feb. 3, 2009, with negative implications.

The outlook is stable.

In addition, Standard & Poor’s affirmed its ‘AA’ transfer and convertibility risk assessment on the republic.

“We removed these ratings from CreditWatch after evaluating the possible consequences and the cost associated with the government bailout of one of Trinidad’s largest financial conglomerate: the CL Financial Group,” explained Standard & Poor’s credit analyst Roberto Sifon-Arevalo. “Assuming no recovery from any asset sales, we estimate a potential gross loss for the government of about TT$9 billion, which is 6% of expected 2009 GDP.” At the same time, Trinidad and Tobago’s solid fiscal profile, which has resulted from several years of high-energy prices, gives the government the fiscal and external flexibility needed to manage this potential debt burden as well as the current international financial crisis without materially weakening public finances.

The government is responding to these shocks through countercyclical fiscal measures. In this context, Standard & Poor’s expects the general government will have a deficit of 4.5% of GDP in 2009, down from a surplus of 6.3% of GDP in 2008. In 2010, we expect the deficit to be at about 3.5% of GDP as the government continues with its public infrastructure program aimed to mitigate the impact of the world economic crisis in Trinidad.

Standard & Poor’s does not expect the government to contribute nor tap into the Heritage and Stabilization Fund (HSF) to finance the expected deficit in 2009 or in 2010, keeping the fund’s balance at about 11% of 2009 GDP. We believe that the government will finance the deficit with debt, mostly domestic. As a result, we also expect net general government debt to reach 7% of GDP in 2009 and 12% in 2010, which compares favorably with 28% and 31% for the medians of ‘A’ rated peers in the same respective periods.

“Improvements in transparency, governance, and regulation in the financial industry–and among public-sector enterprises, in particular–could further strengthen Trinidad and Tobago’s creditworthiness over the medium term,” Mr. Sifon-Arevalo added. “Conversely, a higher-than-expected fiscal deterioration because of higher-than-forecasted costs associated with the government bailout of CLFG as well as slippages in the pace of restructuring government-owned entities could lead to an unfavorable rating action.”

Are you listening, Mr Manning?

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.”

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.