S&P Downgrades Greece To CC From CCC, Expects Recovery Of 30-50% By Principal Bondholders

Tyler Durden's picture

Long-Term Sovereign Rating On Greece Cut To 'CC' On Likely Default; Outlook Negative

Overview

Following review of the July 21 statement by the European Council (EC), Standard & Poor's has concluded that the proposed restructuring, in the form of an exchange into discount or par bonds or a rollover into 30-year par bonds, of Greek government debt would amount to a selective default under our rating criteria.

In anticipation of the debt exchange, we have lowered the long-term rating on Greece to 'CC' and we have affirmed the 'C' short-term rating.

The outlook on the ratings is negative.

We view the proposed restructuring as one that would amount to a "distressed exchange" under our criteria because, based on public statements by European policymakers, the debt exchange or rollover is likely to result in losses for commercial creditors, and the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default. Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.

While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest.

Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders.

Rating Action

On July 27, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the Hellenic Republic to 'CC' from 'CCC'. At the same time we affirmed the short-term rating at 'C'. The outlook is negative. Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders, including on those bonds subject to a 20% reduction in net present value (NPV) as estimated under the Institute for International Finance (IIF) proposal.

Rationale

Following review of the European Council's (EC's) July 21 statement, Standard & Poor's has concluded that the proposed restructuring of Greek government debt would amount to a selective default under our rating methodology. We view the proposed restructuring as a "distressed exchange" because, based on public statements by European policymakers, it is likely to result in losses for commercial creditors. Moreover, the objective of the debt exchange/rollover is to reduce the risk of a near-term debt payment default and to give the Greek government more time to undertake fiscal consolidation and policy reforms.
Under our criteria, we characterize a distressed borrower as one that would--in the absence of debt relief--fail to pay its debt on time and in full.

The restructuring proposal put forward by the IIF gives investors the option of exchanging either into discount or par bonds, or rolling over into 30-year par bonds.

In the debt exchange option, we understand that new, discount bonds would be offered in exchange for existing bonds at 80% of  par and would pay investors effective interest rates of 7.17% and 7.69% on the 15-year and 30-year maturities, respectively.

Alternatively, investors could swap into 30-year bonds at par, which would pay an effective interest rate of 4.6%.

At the same time, the IIF is proposing a €40 billion debt buyback fund that would aim to repurchase Greek secondary market debt at an average discount of just under 40% of face value.

In our opinion, the terms of both the exchange and rollover options appear unfavorable to investors. The new debt instruments' maturity would extend well beyond the maturity of bonds tendered in the proposed exchange and rollover options, and beyond what Greece could currently issue in the market. We assess the interest rate levels paid on the new bonds as significantly below rates available to buyers in the secondary market. As a consequence, we assess the restructuring as distressed, and we view the terms of the restructuring as offering less value than the promise of the original securities. Under our criteria, this leads us to conclude that the restructuring amounts to a selective default.

The purchase of Greek sovereign bonds in the secondary market one at a time would not be viewed by Standard & Poor's as a selective default, as we would view these as transactions entered into voluntarily by both the buyer and the seller. Nevertheless, purchases of debt securities at large discounts to par are an indication of weakened issuer creditworthiness. Moreover, under Standard & Poor's methodology, coordinated bond buybacks at fixed prices could be considered selective defaults. For these reasons, we are downgrading Greece's long-term foreign currency rating to 'CC.'

Our recovery rating of '4' for Greece remains unchanged, indicating an estimated 30%-50% recovery of principal by bondholders after taking into account the 20% reduction in NPV likely to occur under the first round of restructuring, as estimated under the IIF proposal. Our recovery rating base-case default scenario for Greece continues to incorporate a second debt restructuring, including considerably higher principal "haircuts" on top of those proposed under the IIF exchange. Under the IIF's accompanying exchange
proposal, some of the securities into which investors can swap will be collateralized with 'AAA' rated, zero-coupon bonds. In that case, we will assess if the recovery of principal on 'AAA' collateralized instruments could be significantly higher than that of senior unsecured Greek government bonds, which could then lead to higher issue ratings for the collateralized instruments. Nevertheless, our experience with similar arrangements, such as that for Brady bonds, suggests that the new securities may not be immune to
future restructuring and losses, and that recovery may not necessarily be higher than for that of unsecured securities.

Our country transfer and convertibility (T&C) assessment for Greece, as for all eurozone members, is 'AAA'. A T&C assessment reflects Standard & Poor's view of the likelihood of a sovereign restricting nonsovereign access to foreign exchange needed to satisfy the nonsovereign's debt service obligations. Our T&C assessment for Greece reflects our view that the likelihood of the ECB restricting nonsovereign access to foreign currency needed for debt servicing is extremely low. This reflects the full and open access to foreign currency that holders of euros enjoy, and which we expect to remain the case in the future.

Should Greece exit the eurozone (which is not our base-case assumption) and introduce a new local currency, the T&C assessment would be reset to reflect our view of the likelihood of the Greek sovereign and its central bank restricting nonsovereign access to foreign exchange needed for debt service.

Contrary to the current case, the euro would in this scenario be a foreign currency, and the Bank of Greece would no longer be part of the European System of Central Banks. Under our criteria, the T&C assessment can be at most three notches above the sovereign foreign currency rating. In most reasonable scenarios, Greek-domiciled holders of euros would likely continue to face no
restrictions in converting euros to dollars, Swiss francs, or other foreign currencies, the issue addressed by the current T&C assessment.

Outlook

The outlook is negative. While no exact date has been announced to initiate Greece's debt restructuring, we understand that it will commence in September 2011 at the earliest. Upon the announcement of the implementation of the restructuring, a downgrade to 'SD' (selective default) would likely occur. Should the exchange/rollover be initiated, Standard & Poor's would expect to revise the rating on the specific obligation to 'D' (default) even if only a portion of the rated bonds is subject to the exchange offer. We would also likely revise the sovereign credit rating (the issuer credit rating) to 'SD'.

On conclusion of the exchange and/or bond buybacks, we would likely raise the sovereign credit rating on Greece to a level commensurate with our forward-looking opinion on the likelihood of future defaults given Greece's adjusted debt profile. If the exchange involves multiple separate transactions over several weeks or months, we would assign our 'SD' sovereign credit rating
to Greece on completion of the first repurchase. Subsequently, all other things being equal, we would likely raise our sovereign credit rating as early as a few days after completion of the first repurchase.

In our opinion, the likelihood of a future default on the new securities is likely to remain high. We anticipate that we would assign a
low-speculative-grade rating to Greece, given our view that Greece will likely continue to be burdened by high debt to GDP of just under 130% of GDP at end-2011 and uncertain growth prospects even after the debt restructuring is concluded.

Conversely, if the terms of the transactions do not result in a default under our criteria, and the Greek government complies with the revised EU/IMF program, our ratings on Greece could stabilize at the current 'CC' levels, even taking into account the risk of a debt restructuring in the form of a principal haircut by 2013.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Texas Ginslinger's picture
  1. /\  Hi Ho Silver.........
  2. \/  so long, stock markets, it was nice to know you....
RobotTrader's picture

 

 

Problem:  European sovereign debt is about to implode

Solution:  Sell gold, sell gold stocks, and buy U.S. dollars

Side Effect:  NFLX now up $19 from yesterday's opening lows, stock has risen from $40 in Nov. 2008 to $270 after the selloff, wow!!!

Bay of Pigs's picture

Fuck off already you douchebag. You're a clown.

GeneMarchbanks's picture

Truly though, you're a piss puddle.

Al Huxley's picture

Futures last trading day today for gold. And GDX, GDXJ have just pulled back to the 20dma, gold still over 1612/oz. Not much of a selloff. Really, not much selling anywhere, considering the circumstances.

nedwardkelly's picture

Just don't understand the anti robo rage.

Isn't this place better for the fact that it's not just one gigantic clusterfuck of groupthink?

Bay of Pigs's picture

Do you read and understand his dogshit or what? That kind of propaganda only serves to misinform, confuse and discredit others. He offers nothing in the form of useful financial information at all.

Is that clear enough for you?

nedwardkelly's picture

So ignore it. Why all the rage?

GoldenCalf's picture

> That kind of propaganda only serves to misinform

 

So, he's guilty of thought-crime? Or can your opinions not stand up to differing views?

JimBowie1958's picture

Not thought crime so much as failing to contribute anything useful to the discussion, making predictably erroneous predictions (long term) and not responding to discussion.

At first I felt the same way you do but over time I have come to regard Robo as just trolling.

It is a shame because I get the feeling that he could contribute to the discussion in an intelligent way, but he seems to have either given up or just content himself with aggravating the hell out of everyone.

Djirk's picture

Agreed, if you are going to bash someone at least have something relevant and intelligent to say. pisspuddle ? go back to grammer school.

Equities down, Greece triple fishhooks (CCC) and USD/EUR down????? My correlation cruncher must be broken.

Cover your shorts.

GeneMarchbanks's picture

It is good that they added the section entitled 'Rationale' this provides some insight seeing as how thgis is totally out of leftfield. S&P: We are prophets.

dogismyth's picture

I've never used NFLX.  Never ate at CMG.  And I don't own an AAPL crap.

Will I be tried as a witch?

Vic Vinegar's picture

No.  You are just missing out on a lot of fun.

slaughterer's picture

Robot-Trader, Tyler should at least restore your video posting privileges.  Those soft porn videos you selected were really a relief for us after lunch.

Neezer's picture

It's a good thing that a Greek default and subsequent loss on recovery was included in the last European bank stress test!
... oh wait a minute, it wasn't?

caerus's picture

Alternatively...a loss of 50% to 70%

hedgeless_horseman's picture

Our recovery rating of '4' for Greece remains unchanged, indicating bondholders are fourked.

r101958's picture

Of course! Couldn't let the dollar continue tanking. Couldn't let oil go over $100.

A Man without Qualities's picture

A recovery rate of 30% would be a masterpiece by the kleptocrats of Greece.  I can see them all now, telling their overseas friends how terrible this is for Greece, and how shameful it is, how incompetent their politicians are, how corrupt the trades unions, etc etc, but in the back of their minds they'll be thinking about the millions of Euros they've got on deposit in offshore bank accounts and smiling...

jmcadg's picture

The flip flop continues. Euro & Dollar are both doomed. 

Current lack of action is the calm before the storm. Looking forward to some proper fireworks soon.

Hulk's picture

Its  Turtles all the way down man!

jmcadg's picture

They took all they could from the bailouts, knowing that they couldn't pay it back. Notice they're Central Bank bought 1million ounces of gold at the same time they were snuffling up the last bailout amount. They are not stupid.

Sinwhore Ponzi's picture

You could reset The Greek Debt to zero tomorrow...they would be bankrupt again in five years. The problem with Greece is that its filled to the rafters with Greeks. The problem with Greeks is that they will go to any length to avoid paying tax. Take away shipping and sunshine and you're left with very little. S&P recovery rating of 4? What a joke! The barber shop is adding extra seating.

Caviar Emptor's picture

Ouch! Isn't that kind of stomping on a corpse S&P? Trying to repair cedibility still after the 2008 mega-fiasco to end all fiascos (Detroit real estate CDOs rated AAA)

carbonmutant's picture

Executives from U.S. credit rating agencies are expected to face sharp congressional scrutiny on Wednesday for their companies' roles in the financial crisis and the U.S. debt ceiling debate.

http://www.reuters.com/article/2011/07/27/us-usa-debt-raters-idUSTRE76P4...

Jesse's picture

 

I am curious to know why this does not trigger the credit default swaps.  Or does it?

Is this doesn't what protection do they offer?

Jesse's picture

 

I am curious to know why this does not trigger the credit default swaps.  Or does it?

Is this doesn't what protection do they offer?

Jesse's picture

 

I am curious to know why this does not trigger the credit default swaps.  Or does it?

Is this doesn't what protection do they offer?

JimBowie1958's picture

I am curious to know why this does not trigger the credit default swaps.  Or does it?

Is this doesn't what protection do they offer?

Me too. And what effect does such a cut have on the situation when one considers how much of the banks have bought these bonds with elverage. How does that play out with a 30% cut?

Zap Brannigan's picture

Alright seriously, aren't these ratings just varying degrees of insolvent? I mean, you can say someone's alive even if he's braindead, on a feeding tube, in complete organ failure, on a ventilator, with a mile-long catheter up his pee stick, but for all intents and purposes, dude's a goner.

Buck Johnson's picture

Just let Greece default already.

karmete's picture

Well done! Thank you very much for professional templates and community edition sesli siteler sesli sohbet

chinawholesaler's picture

Wine Set
Promotional Products

Wholesale Badge
Hair Products
Wholesale Stationery

Wholesale Keychain
Wholesale Mp3
Wholesale Glasses

Wholesale Mobile Phone
Poncho Raincoat
Wholesale Coaster

Vocal Concert Products
Wholesale Coaster
Digital Photo Frame

Photo Frame
Wholesale Flag
Wine Set

Wholesale Ruler
Wholesale Whistle
China Wholesale

Audio Video Equipment
Wholesale USB Products
Wholesale Cup

Wholesale Banner
Electrical Gifts
Fishing Supplies

Mouse Pad
Entertainment Supplies
Wholesale Dartboard

Wholesale Dartboard
Tape Measure
Health Care Products

Wholesale Album
Wholesale Bookmark
Wholesale Flag

Money Clip
Wholesale Mug
Wholesale Clocks

Lunch Box
Valentine Gifts
Hair Products

Crystal Gifts
Wholesale Clothing
Electroluminescent

Advertising Material