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Fitch Blows At Greek Bailout House Of Cards, Says On Closing Of Distressed Debt Exchange Will Place Sovereign Rating Into Default

Tyler Durden's picture




 

As we speculated yesterday...

  • If in Fitch's opinion, an announced exchange offer constitutes a DDE,
    the sovereign issuer rating will be lowered to 'C', indicating that
    default is highly likely in the near term
  • Fitch will place the issuer rating of the sovereign into default, specifically 'Restricted Default' (RD) upon closing of a distrssed debt exchange.
  • Fitch says a potential Greek debt exchange if voluntary, could still be considered a default event
  • Fitch says Greek debt exchange would be a default if bondholders terms were worse than original terms
  • Fitch says stressed sovereign debt exchange with worse terms is a technical default even if deemed voluntary

The gist is clear: the great unknown of how the rating agencies will treat even a "voluntary" restructuring is still in the closet.

FITCH OUTLINES RATING APPROACH TO A SOVEREIGN DEBT EXCHANGE
 
Fitch Ratings-London-06 June 2011: Given considerable market speculation regarding a possible debt exchange involving Greek ('B+' / Rating Watch Negative) sovereign debt, and subsequent interest in the rating approach adopted by Fitch Ratings in determining whether a debt exchange is an event of default and the rating implications before and after an exchange, the agency has outlined below its approach to sovereign debt exchanges based on its general 'Coercive Debt Exchange Criteria.'
 
There are two guiding principles in determining whether a debt exchange constitutes a default event or is an opportunistic 'liability management' exercise that has no rating implications. The first is an assessment of the terms on the new securities offered in the exchange and whether they are materially less advantageous to bondholders than the existing securities. The second guiding principle is whether the exchange is, or appears to be, necessary to avoid insolvency and/or illiquidity. Thus a debt exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress (which can be reflected in low issuer ratings, or ratings which have seen a sharp downward migration, or both) would be judged by Fitch to constitute a 'coercive' or more commonly known as a 'distressed debt exchange' (DDE) and hence a default event, even if bondholders' participation was deemed to be 'voluntary.'
 
A more complex situation would arise if the terms on the new securities, taken in the whole, were considered to be broadly neutral or better than the terms on the existing securities. For example, the offered securities may incorporate significant credit enhancements in the form of collateral and other features such as higher and/or step-up coupon profile. Determining whether the terms on the new securities imply an economic loss or gain relative to the terms of the existing securities can be complex and subjective, with a net present value analysis providing only a guide. Participation in the exchange would also have to be 'voluntary' in the sense that bondholders are not subject to 'sanction' if they choose not to participate. An important guide in this respect is that securities not tendered are not at greater risk of non-payment nor are they implicitly or explicitly subordinated to the securities created by the exchange.
 
If in Fitch's opinion, an announced exchange offer constitutes a DDE, the sovereign issuer rating will be lowered to 'C', indicating that default is highly likely in the near term. The ratings of the securities subject to the exchange will also be lowered to 'C'. On closing of the exchange offer and following confirmation that the exchange will be completed (for example because the minimum threshold for participation has been met), Fitch will place the issuer rating of the sovereign into default, specifically 'Restricted Default' (RD). The ratings of the tendered securities will be lowered to 'D' and will remain at that level for as long as the sovereign is rated 'RD'. The ratings of eligible securities that are not tendered and continue to be serviced will remain at 'C' until the exchange is completed with the issue of new securities.
 
Fitch will conduct a review of the credit profile of the sovereign in light of its anticipated post-exchange capital structure along with other relevant information after the offer date has closed and prior to completion marked by the issue of new securities. Based on such a review, Fitch may issue expected ratings on the new securities that would be confirmed on completion of the exchange (or very shortly thereafter) and receipt and review of the relevant documentation. On completion of the exchange, Fitch will also assign new issuer ratings to the sovereign and simultaneously withdraw the ratings of the securities extinguished by the exchange. The ratings of the securities not tendered in the exchange could be raised from 'C' to the level of the rating of the new securities if those ratings are higher and they are not in any way subordinated to the new securities. However, if securities not tendered into the exchange subsequently become non-performing, the sovereign (issuer) ratings will remain in default.

 

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Mon, 06/06/2011 - 10:35 | 1343193 SheepDog-One
SheepDog-One's picture

'Restructuring' of the sand castle.

Mon, 06/06/2011 - 10:39 | 1343199 Cdad
Cdad's picture

Dog,

That's a "soft restructuring."  Please, pay proper respect to Big Brother, whom you love.

 

Mon, 06/06/2011 - 10:41 | 1343226 SheepDog-One
SheepDog-One's picture

This time, theyre reinforcing the sad structure with cards...pure mastery! Well until the tide comes in.

Mon, 06/06/2011 - 10:44 | 1343229 hedgeless_horseman
hedgeless_horseman's picture

We are NOT remodeling, Mr. Building Inspector.  We are merely redecorating.

Mon, 06/06/2011 - 10:51 | 1343243 SheepDog-One
SheepDog-One's picture

Just like the bankers upon TARP ordering their new $50,000 gold toilets with legs on them....have to remodel the offices we're in a RECOVERY after all! 

Mon, 06/06/2011 - 20:35 | 1345353 StychoKiller
StychoKiller's picture

Once the legs are placed on them, they can be deducted as "office furniture" :>D

Mon, 06/06/2011 - 10:39 | 1343197 oogs66
oogs66's picture

Will count as default in the rating agency statistics.

Will NOT be a Credit Event for CDS

Will NOT fool equity investors in banks.

Will fool bankers who only look at book value.

Mon, 06/06/2011 - 10:41 | 1343207 Bob
Bob's picture

When the financiers have the proles by the balls, the question is only--to their minds--what will keep them happy, wealthy and wise. 

Austerity is necessary to preserve the integrity of "the system."

No surprise that their ideologically neutral whores at the ratings agencies are compelled by conscience and professional ethics to issue the appropriate threats of knee cappings . . . we wouldn't wanna see anybody get hurt now, would we?

Mon, 06/06/2011 - 10:54 | 1343258 topcallingtroll
topcallingtroll's picture

Why are you so against what fitch says?

The weasel words and game playing and looking for technicalities is from the sovereigns and the EMU. They are the ones looking for ways to change the contract unilaterally without triggering a default.

Mon, 06/06/2011 - 11:01 | 1343279 Bob
Bob's picture

From a naive perspective, it seems like they're doing nothing more than doing their jobs.  That's the beauty of the system . . . Hey, they're just trying to do the right thing, "telling it like it is." 

That ship sailed so long ago, though.  It's the larger context that bothers me.  This sovereign, like virtually all the rest, is already insolvent.  If Fitch et al were to sincerely do their job, they would come out and say so. 

Clearly they have a different role in the grand scheme of things. 

Mon, 06/06/2011 - 11:11 | 1343315 ibjamming
ibjamming's picture

They have the same role that "mortgage assessors" had in real estate...keep values up as long as possible...and we know where that ended up going.

Mon, 06/06/2011 - 11:19 | 1343327 Bob
Bob's picture

Hell, they have the same role they had in the mortage securitization scam itself!  Now they're just talking out of the other side of their mouths.  Same game, different offense.  

Mon, 06/06/2011 - 10:43 | 1343215 PeaBird
PeaBird's picture

the great unknown of how the rating agencies will treat even a "voluntary" restructuring is still in the closet.

Greece is insolvent. Does it matter or not whether the Anglo rating agencies say so or not? Does a bear shit in the woods, if no one is there is see it?

 

Mon, 06/06/2011 - 10:45 | 1343238 Bob
Bob's picture

One could almost suspect that they're putting pressure upon the Greeks to bend over just so they can continue to extend and pretend . . . while the public still has any assets of value to be sucked free. 

Mon, 06/06/2011 - 10:41 | 1343222 glenlloyd
glenlloyd's picture

Ha, so much for 'voluntary restructuring' being benign.

Mon, 06/06/2011 - 11:10 | 1343306 Bob
Bob's picture

Haircuts=Bad, Bad, Bad!  Don't hurt yourselves by trying to go down that road

Don't even think abouddit. 

Mon, 06/06/2011 - 10:47 | 1343230 scratch_and_sniff
scratch_and_sniff's picture

Fitch would say that though, wouldn't they?

Mon, 06/06/2011 - 10:48 | 1343235 Jack Burton
Jack Burton's picture

 For god's sake Greece, Default and let's be done with it. This is like Chinese Water Torture! Default the debt! Be the next Iceland. Screw the European Banks, let them burn. Once the banks burn down, then rebuilding a new economy becomes possible. Until the Bankers are taken down it will be nothing but more and more debt slavery. They are moving from nation to nation imposing Austerity for the people and sucking all the wealth into the banks.

Iceland led the way, the rest seem to be a pack of wankers and cowards beholden to the banker class.

Mon, 06/06/2011 - 10:52 | 1343253 SheepDog-One
SheepDog-One's picture

The overgrown forest only becomes renewed after a fire where all the pinecone seeds are popped open. 

Mon, 06/06/2011 - 11:32 | 1343372 Bananamerican
Bananamerican's picture

yea, but fire suppression efforts over the years lead, ironically, to soil sterilizing holocausts...."The system" hasn't allowed much deadwood/underbrush to be cleared in a while...to the contrary

Mon, 06/06/2011 - 10:46 | 1343242 Jack Burton
Jack Burton's picture

 What's worse than a banker? The politicians that the bankers bribe!

Mon, 06/06/2011 - 10:51 | 1343259 oogs66
oogs66's picture

That comment could be posted equally well in the previous article on Goldman.  Heck, it could go on a lot of the articles these days.

Mon, 06/06/2011 - 10:51 | 1343246 oogs66
oogs66's picture

Is there any impact at all from the rating agencies determining it is a default?  The banks won't mark them to market anyways, the ECB will change their collateral rules, and it doesn't impact CDS contracts, so why do we care what Fitch, Moody's and S&P call it?

Mon, 06/06/2011 - 10:51 | 1343247 CrashisOptimistic
CrashisOptimistic's picture

The swaps have always been at the core of all of this, and they're not going away.

Mon, 06/06/2011 - 10:54 | 1343270 Jack Burton
Jack Burton's picture

 Ideed! Swaps, the CDS sold on a Greek default. God know's how huge those positions are. CDS "weapons of mass destruction".

Mon, 06/06/2011 - 10:56 | 1343275 topcallingtroll
topcallingtroll's picture

Swaps are the canary in the coal mine.

So what does the EU do when mining conditions are dangerous?

They propose to ban canaries!

If we cant detect a problem then it wont exist. Smart thinking.

Mon, 06/06/2011 - 11:03 | 1343289 Double down
Double down's picture

A coal mine canary is a black swan:)

Mon, 06/06/2011 - 10:54 | 1343255 falak pema
falak pema's picture

anyways, Greece is golden fleece to the germans now. They've fleeced the sheeple and will sacrifice the ram next. Let the wolves howl, the Oligarchy knows how to muzzle the bleatings of the sheeple...all over the world.
Sovereign default is not the problem. Private bank default is; as that's where the Oligarchs keep their money! So nations die, not the Oligarchs!

Mon, 06/06/2011 - 10:56 | 1343256 baby_BLYTHE
baby_BLYTHE's picture

The Dow to Gold ratio is now below 8 @ 7.81!

clearly the currency is being devalued.

back in the day it was a crime punishable by death to counterfeit the currency.

Mon, 06/06/2011 - 10:51 | 1343263 GeneMarchbanks
GeneMarchbanks's picture

Tyler, would you say reality is making a comeback or (if this has any momentum) will this only further the complications?

Mon, 06/06/2011 - 10:56 | 1343276 glenlloyd
glenlloyd's picture

I'm sure the angry calls to Fitch by whining politicos have already started.

Mon, 06/06/2011 - 11:03 | 1343281 BlackholeDivestment
BlackholeDivestment's picture

Oxymoron=Black Hole

Mandatory Volunteer= It's all German to Greeks

http://www.youtube.com/watch?v=Csv1wXOr5tY&feature=related

Mon, 06/06/2011 - 11:11 | 1343316 shortus cynicus
shortus cynicus's picture

I like no-fly zone definition: everything that can not fly must be destroyed.

Mon, 06/06/2011 - 11:05 | 1343298 shortus cynicus
shortus cynicus's picture

I expect oligarchs rioting in Frankfurt.

Mon, 06/06/2011 - 11:12 | 1343319 Oh regional Indian
Oh regional Indian's picture

Truth lags nowadays. As a matterof fact, it lags so much, it's just done for.

This Fitch action, that Moodly's action, all of it in the face of not havign th eballs to call th eEmperor naked, is just bullshit.

ORI

http://aadivaahan.wordpress.com/2011/05/26/the-video-trailer/

Mon, 06/06/2011 - 11:16 | 1343328 AldoHux_IV
AldoHux_IV's picture

Ratings agencies are an illusion of objectivity, but in the end add no real value to determining real risks both in the short and long term, and have become utterly worthless.

Mon, 06/06/2011 - 11:23 | 1343340 dcb
dcb's picture

the reading on this is wrong. this is a way to force the governments to bailout and not restructure. I assure you this came from some presure, most likley the US, geithner. the last thing these people can afford is to show the world doesn't collapse when this stuff is restructured. the MAD card is a way to force compliance.

Mon, 06/06/2011 - 12:34 | 1343582 reload
reload's picture

Good call ! I think you will be proven right. The CDS card gets played again.

Mon, 06/06/2011 - 20:44 | 1345373 StychoKiller
StychoKiller's picture

Without the bluster, THEY would have to resort to "kinetic actions", very messy!

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MGHJFHD's picture

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