BEIJING -- Dagong Global Credit Rating Co., Ltd. downgraded the foreign currency sovereign credit rating of the Republic of Argentina from CC to D, and maintain the local currency sovereign credit rating at CCC. The Argentine government failed to make the scheduled interest payment of foreign currency exchanged bonds on July 30th, 2014, violating the will of the bondholders, and inflicting material loss to them. Accordingly, Dagong determines that the Argentine government has defaulted on its foreign currency exchanged bonds.
The main reasons for downgrading the foreign currency sovereign credit rating are as follows:
Dagong’s definition of default by a sovereign government involves two necessary conditions. Condition one, the sovereign government fails to follow the contract to repay interest and principal on time and in full, incurring losses of creditors; Condition two, the sovereign government fails to fulfill its contractual obligations, and fails to reach consensus with creditors before default, i.e., the creditors are non-voluntary.
After the default of its foreign currency debt in 2001, the Argentine government carried out two rounds of foreign debt restructuring through debt swaps in 2005 and 2010. Around three quarters of the debt holders of the defaulted debt accepted the debt swaps, representing 93% of the defaulted debt. However, after buying the defaulted bonds at discounted prices, some hedge funds refused to participate in the debt restructuring and demanded full repayment through litigation.
On November 21 2012, the United States District Court for the Southern District of New York ruled that the Argentine government should repay holdout litigating creditors in full. On June 16 2014, the U.S. Supreme Court declined to hear the appeal of the Argentine government. On June 27, the U.S. District Court required that Argentina should not make the US$539 million interest payment due June 30 on its exchanged bonds before full repayment to its litigating creditors. Despite the 30-day grace period, the Argentine government failed to reach an agreement with the litigating creditors and missed the scheduled interest payment on the exchanged bonds on July 30.
Dagong holds that the failure of the Argentine government to repay the interest of exchanged bonds on time has met Dagong’s criteria of debt default. Although the Argentine government’s willingness and capability of debt repayment exhibits no essential changes since the last surveillance rating, the ruling of the U.S. District Court prevented the Argentine government from making the interest payment to its exchanged bondholders with its funds in Bank of New York Mellon. Meanwhile, the government has not reached a new agreement with the exchanged bondholders to avoid a default. As a result, the failure of the Argentine government to make interest payment on July 30 has inflicted material losses to the bondholders and violated their will.
"Such an incident met the two necessary conditions of sovereign default stipulated by Dagong, we hereby determine that the Argentine government has defaulted," Dagong said in a statement.
"Since the foreign currency debt default was caused by third-party factors which has not fundamentally jeopardized Argentina’s local currency solvency, Dagong maintains the local currency sovereign credit rating of Argentina at CCC. In the mean time, Dagong will closely monitor the negotiation progress between the Argentine government and the litigating creditors as well as the exchanged bondholders, which will be used as important basis for determining the sovereign credit ratings of Argentina in the future," Dagong concluded.