February 10, 2012 / 8:01 PM / in 7 years

TEXT-S&P:Greece retroactive CAC would constitute selective default

Feb 10 - Standard & Poor’s Ratings Services said today that under its ratings criteria, application of retroactive “Collective Action Clauses” (CACs) affecting the timing or amount of debt service payments on outstanding Greek-law governed sovereign debt would constitute a selective default. Were such CACs implemented, Standard Poor’s would lower the sovereign credit rating (the issuer credit rating) on Greece to ‘SD’.

In the case of the Greek parliament passing legislation that would permit the amendment of Greek-law governed outstanding sovereign debt issues to retroactively include CACs, we would lower the issue ratings on debt issues concerned to ‘D’ from ‘CC’. For non-Greek-law governed sovereign debt issues unaffected by any change in Greek law, we would maintain our issue ratings on such non-Greek-law governed issues at ‘CC’, but subsequently lower the issue ratings to ‘D’ if and when they became eligible for the upcoming debt exchange. Under Standard & Poor’s criteria, an issuer’s unilateral change of the original terms and conditions of an obligation—even if not necessarily significant—may be viewed as a de facto restructuring and thus an event of default (see “Rating Implications Of Exchange Offers And Similar Restructurings, Update”, May 12, 2009).

Under our criteria, the definition of “restructuring” includes exchange offers featuring the issuance of new debt with less favorable terms than those of the original issue without what we view to be adequate offsetting compensation. “Less favorable terms” may include, for example, reduced principal amount, extended maturities, lower coupon, different currency of payment, different legal characteristics that affect debt service, or effective subordination. While we do not generally view CACs (to the extent included in an original issuance) as changing a government’s incentives to honor its full and timely payment obligations, in light of the protracted discussions over Greece’s sovereign debt we take the view that legislation leading to the Greek government’s introducing CACs to outstanding Greek sovereign debt issuances indicates a forthcoming debt restructuring, which we expect to take place in the coming weeks.

We will also likely view any restructuring of Greek government debt as “distressed”, meaning that we would consider the restructuring as likely materially changing, to the detriment of investors, the size and/or profile of Greece’s sovereign debt burden as a result of its financial distress. Accordingly, it is our view that the terms of any Greek debt restructuring, including the retroactive application of CACs to Greece’s sovereign issuances will likely offer less value to debt holders than was promised by the terms of the original issues (see “Long-Term Sovereign Rating On Greece Cut To ‘CC’ On Likely Default; Outlook Negative” published July 27, 2011). Under our criteria, this consequence would then prompt the rating actions described above.

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