NEW YORK Nov 30 Standard & Poor's said on Friday that unless Argentina and holdout bond investors reach a payment agreement on defaulted debt from 2002 its B-minus credit rating on the South American nation is at risk of a downgrade.
On Wednesday the U.S. 2nd Circuit Court of Appeals granted an emergency stay on a lower court's order that Argentina transfer into an escrow account for holdout investors a payment of $1.33 billion by Dec. 15.
While that removed the threat of an imminent default and therefore a downgrade of its credit rating, Argentina has vowed it would never pay holdout investors.
"We believe that the chances of Argentina making that deposit would have been low," S&P said in a research note late on Friday, referring to the deposit that would guarantee payment to the holdout investors if they ultimately triumph in the case.
S&P's belief is based upon Argentina not complying with U.S. District Court Judge Thomas Griesa's orders to pay billions of dollars in awards to holdout investors over the decade long legal battle.
But the rating agency said the ruling gives Argentina more time to either settle with the holdout investors or make alternative arrangements to pay those bondholders who have participated in past restructurings.
If Griesa's latest ruling to pay holdouts survives the appeals process and Argentina still refuses to pay, U.S. courts could eventually block debt payments to creditors who took part in the restructurings out of consideration for investors who rejected Argentina's terms at the time.
That would trigger a technical default on approximately $24 billion worth of debt issued in the 2005 and 2010 exchanges.
"If we see that debt payments on which the sovereign is current are threatened, we could lower our ratings to the 'CCC' category," S&P said.
"We could lower our rating on Argentina to 'SD' (selective default) if it misses a payment on the exchange debt and the default is not cured within five days, or if Argentina makes payments at variance to the terms of its bond indentures," it added.
S&P's current rating outlook is negative. Moody's Investors Service rating of B3 is equal to S&P's while Fitch slashed the rating three notches to CC earlier this week. All three agencies have a negative outlook on the credit.
The pending appeal, to be heard by the 2nd Circuit on Feb. 27 means Argentina can make its December payments to investors who participated in the exchanges and not risk default.
S&P said if there is a change of heart on Argentina's part and an amendment of its so-called "lock law" which prohibits the government from making a new offer to holdouts, there could be a positive impact on the rating.
"First, it could lessen the risk of interruption of debt service from holdout creditors," S&P said, adding: "And second it could constitute an additional step to facilitate Argentina's return to international capital markets."