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S&P knocks Cyprus down to ‘selective default’

Standard & Poor’s Ratings Services lowered on Friday its long and short-term sovereign credit ratings on the Republic of Cyprus to selective default (SD) from ‘CCC/C’.

At the same time, Standard & Poor’s said that their transfer and convertibility (T&C) assessment for Cyprus, as for all other eurozone members, remains ‘AAA’.

“We lowered our sovereign credit ratings on Cyprus to ‘SD’ after the government announced an exchange offer on a number of its local law governed bonds. In our opinion, the exchange materially changes the terms of the affected debt and constitutes what we consider a distressed exchange according to our criteria,” S&P said.
“We view the extension of maturities without what we find to be adequate offsetting compensation as the exchange of new debt on less favourable terms to the existing debt. We also consider the offer as distressed, rather than purely opportunistic, given limited financing options available to the government and our previous rating on the government’s debt, ‘CCC’,” it added.

It noted that “more than 50% of the debt eligible for the exchange will be swapped for the new longer-dated securities; most of the participants, we understand, are large domestic banks. We also understand that any capital needs the transaction creates will be met by the European Stability Mechanism (excluding the Bank of Cyprus).”
It said that in terms of design, the new bonds will be tradable and include collective action clauses, which were absent in the original securities. After the settlement of the exchange, which we expect July 1, the liquidity strains on the government, having also just received its second €1 billion tranche under the MoU with the Troika, should be alleviated, it added.

“We note, however, that the government will still need to deal with the forthcoming rollover of a stock of €950 million Treasury bills (5 per cent of GDP),” S&P said.

“Post default, we expect to raise our rating on Cyprus to ‘CCC+’. This rating, one notch higher than the rating prior to default, would reflect the resolution of two pressing challenges to the government’s credit standing”.
The first, it added, comes from the expected successful conclusion of this exchange.
The second pertains to a simultaneous and separate extension of a €1.8 billion bond (9 per cent of GDP) the government originally issued to boost Cyprus Popular Bank’s capital (subsequently transferred to the Bank of Cyprus as part of Cyprus Popular Bank’s resolution), in accordance with the bond’s original terms, S&P said adding that “we expect we could raise our rating on Cyprus from SD as early as next week.”

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