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Long-Term Ratings On The Commonwealth of the Bahamas Lowered To ‘BBB+’; Outlook Stable

The Bahamas’ fiscal position has deteriorated, as the government has increased spending while its narrow revenue base has declined amid economic recession.
This has led to a rise in general government debt, and medium-term growth prospects are subdued because of the dependence on U.S. tourism.
As a result, we have lowered the sovereign credit ratings on The Bahamas to ‘BBB+/A-2′ from ‘A-/A-2′.
The stable outlook reflects a gradual tightening of the government’s fiscal stance and generally stable external financing profile.

NEW YORK Dec. 23, 2009–Standard & Poor’s Ratings Services said today that it lowered its long-term sovereign credit ratings on The Commonwealth of The Bahamas to ‘BBB+’ from ‘A–’. The short-term credit ratings are unchanged at ‘A-2′. At the same time, Standard & Poor’s lowered the transfer and convertibility assessment on The Bahamas to ‘A-’ from ‘A’. The outlook is stable.

“The downgrade reflects The Bahamas’ weakened fiscal profile,” said Standard & Poor’s credit analyst Lisa Schineller. “Its debt and deficits have increased, and the composition of its debt has weakened somewhat. In addition, following three years of economic contraction, The Bahamas’ growth prospects beginning in 2011 are modest.”

The increased pressure on The Bahamas’ fiscal profile stems from the combination of higher levels of debt amid a stagnant growth outlook. The higher debt levels reflect the government’s financing its rising fiscal deficits, a result of countercyclical fiscal spending against a drop in The Bahamas’ already narrow revenue base. Specifically, the government has increased capital and social spending to mitigate the social impact of recession. At the same time, revenues fell by 9.2% in fiscal-year 2008/9 (ending June 2009), and Standard & Poor’s expects them to contract again in 2009/10. Compounding revenue vulnerability is The Bahamas’ reliance on the taxes on international trade and transactions (more than 50% of tax revenue) ); the government aims to minimize their decline by modernizing collection mechanisms, especially at customs.

The country’s dependence on one product (tourism accounts for more than 50% of GDP and employs over 50% of labor force) and one market (U.S. tourists account for more than 80% of total) colors prospects for a robust economic recovery given that Standard & Poor’s forecasts a weak U.S recovery. The Bahamian hotel industry does not expect a meaningful revival of tourism until 2011. In addition, once-buoyant prospects for a major expansion of tourism projects are now far more muted. Although high-end niche projects continue to advance, many others are delayed. In the midst of the slowdown in tourism and construction, unemployment has risen to the highest levels since early 1990s and is projected to close the year at about 14%, a jump from 8.7% in 2008.

The stable outlook reflects Standard & Poor’s expectation of a gradual tightening of the government’s fiscal stance and generally stable external financing profile. The Bahamas’ tourism sector is expected to improve only as the U.S. economy recovers. In the meantime, the government is working to put the offshore financial sector, a second economic pillar, on a stronger footing after it was included on the G-20/OECD grey list of offshore financial centers. The authorities have negotiated 10 Tax Information Exchange Agreements (TIEAs), an important step to getting off the grey list. Although The Bahamas’ external financing gap (defined as current account payments plus short-term debt plus medium- and long-term amortization) is high at 135% of current account receipts and useable reserves, it improved in 2009 amid lower current account deficit and higher international reserves. Importantly, the government’s external amortization needs are low, and the bank’s foreign depositor base remains stable. We expect financing needs to remain, on balance, little changed in 2010-2011.

“The ratings could come under downward pressure if The Bahamas’ fiscal deterioration persists and the economic base erodes more severely,” Ms. Schineller added. “Conversely, the ratings could improve following a more proactive government policy response to reduce debt levels or if the commonwealth’s economic prospects strengthen.”

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.

Can’t say you weren’t warned, but this is still a serious blow to Jamaica.

From rating agency Standard & Poor’s on Monday, highlighting mine:

Jamaica Long-Term Ratings Lowered One Notch To ‘CCC’, Outlook Negative

– Jamaica’s Central bank governor, who was the lead negotiator on a possible standby facility from the IMF, has resigned.

– We are lowering the long-term foreign and domestic currency ratings on Jamaica to ‘CCC’ from ‘CCC+’.

– The negative outlook on the ratings signals the growing risk of a debt exchange operation that could be an event of selective default under our distress debt exchange criteria.

NEW YORK, Nov. 2, 2009–Standard & Poor’s Ratings Services lowered its long-term foreign and domestic currency ratings on Jamaica to ‘CCC’ from ‘CCC+’. The outlook on the ratings is negative.

We kept the recovery rating on the senior unsecured debt at ‘4′ and the country transfer and convertibility (T&C) assessment at ‘B’.

The downgrade on Jamaica follows the resignation of Central Bank governor Derick Latibeaudiere, who was the lead negotiator within the framework of a possible standby facility from the International Monetary Fund (IMF).

On Aug. 5, 2009, we downgraded Jamaica’s domestic and foreign currency long-term ratings to ‘CCC+’ with a negative outlook. At that time, we highlighted the fact that Jamaica’s severe fiscal situation as well as the vulnerabilities in the government’s debt profile may give it incentives to renegotiate with its creditors, particularly its resident creditors that hold the larger bulk of Jamaican debt.

“Since then, the government’s room to maneuver continues to narrow as it becomes increasingly difficult to further cut public expenditures–as reflected, in part, in the recently amended budget–in order to sustain an interest burden of about 60% of general government revenue,” said Standard & Poor’s credit analyst Roberto Sifon Arevalo.

The negative outlook on the ratings signals the growing risk of a debt exchange operation that could be an event of selective default under our distress debt exchange criteria. While the government’s engagement with the IMF is a positive effort to address the long-standing structural issues in Jamaica, recent events highlight the complexity of the negotiation process and create more uncertainty about the timeframe for reaching an agreement with the Fund.

Short note from rating agency Standard & Poor’s on Republic Bank (highlighting mine):

S&P: Republic Bank Ltd. Counterparty Credit Ratings Affirmed At ‘BBB-/A-3′ With Stable Outlook

* The bank’s financial performance has been stable through a period of tough economic conditions in the Caribbean region.
* We are affirming the ‘BBB-/A-3′ counterparty credit ratings on RBL.
* The stable outlook reflects the bank’s likely maintenance of its financial profile in 2009 and 2010.
* A downgrade could result from rising nonperforming assets or falling profits, or an upgrade could result from a curtailing of further nonperformers.

MEXICO CITY Oct. 2, 2009–Standard & Poor’s Ratings Services said today that it affirmed its ‘BBB-/A-3′ counterparty credit ratings on Republic Bank Ltd. (RBL). The outlook is stable.

“Our ratings on RBL are based on RBL’s leading market position in Trinidad and Tobago, stable financial performance, and geographic diversification in the Caribbean,” said Standard & Poor’s credit analyst Alfonso Novelo. “However, we believe that strain on the quality of assets through 2010 will pressure profits, the balance sheet relies on short-term funding, and the bank faces strong competition in the region.“

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.”