Yet another downgrade of the country’s sovereign debt to default status has come to no one’s surprise, the Government joined an independent expert in saying today.
Given Government’s decision to embark on a debt exchange programme, Standard & Poor’s downgrade on Wednesday was expected, according to Prime Minister Mia Mottley and BES president Shane Lowe, speaking separately to Barbados TODAY.
“When you go into a debt exchange you can expect a downgrade,’ Prime Minister Mottley said tersely when asked to comment on the development this afternoon.
“This action is not surprising and comes in light of Government’s pending execution of its domestic debt exchange programme,” Lowe told Barbados TODAY.
The downgrade came on the heels of Sunday’s announcement of nearly full acceptance of Government’s local currency debt exchange offer and the issue of new debt instruments by month-end.
Said the New York-based ratings agency: “We are lowering affected issue-level ratings on all Barbados’ rated local currency debt to ‘D’ (default) from ‘CC’.
“We are also affirming our ‘SD’ long- and short-term foreign and local currency sovereign ratings on the country, and our ‘D’ issue-level ratings on Barbados’ foreign currency issues,” it added.
S&P said it affirmed its ‘CC’ transfer and convertibility assessment on the country.
But the Prime Minister promised that “when the debt exchange closes you can expect things to change . . . in a few weeks”.
In its rationale, S&P acknowledged that all local currency treasury bills, treasury notes, debentures, loans, certain government arrears, and debt owned by state-owned enterprises and other entities that receive transfers from the state budget fell within the scope of the exchange.
Therefore, it said, in accordance with its criteria, and “Rating Implications of Exchange Offers and Similar Restructurings, Update”, it had lowered the issue-level ratings to ‘D’ from ‘CC’ on 10 issues of Barbados dollar value instruments with maturity dates between October 31, 2018 and December 31, 2025, at a total value of $575.225 million.
It said the ‘SD’ sovereign long- and short-term foreign and local currency ratings on Barbados reflect that the Government missed its debt service payments on both foreign and domestic debt.
“We expect the Government to issue new debt under its Barbados dollar-denominated debt exchange by the end of October 2018, and continue engaging in dialogue with external creditors to commence a foreign currency-denominated debt exchange in the near term,” it said.
“Once the respective exchange offers are complete, and we are able to conduct a forward-looking review that takes into account the benefits from the exchanges, as well as any other interim developments, we will change the respective issuer and issue ratings, in accordance with ‘Rating Implications of Exchange Offers and Similar Restructurings, Update’ criteria,” S&P said.
At that time the issuer credit rating is likely to be raised to ‘CCC’ or low ‘B’ category.
“The benefits that Barbados will gain following the exchanges, along with implementation of its Barbados Economic Recovery and Transformation plan, will form part of the Government’s strategy to meet the targets set out under the Extended Fund Facility” said S&P of the deal that was approved by the IMF board on October 1.
If Barbados received a ‘B’ category rating in coming months it would be placed on par with Jamaica, which is also currently involved in an International Monetary Fund (IMF) programme and has a debt rating of ‘B’, said Lowe.
“The actual rating will likely depend on S&P’s assessment of the Barbados Economic Recovery and Transformation (BERT) plan’s ability to increase creditworthiness over the near-term.
“However, this rating remains several notches below investment grade and thus, Barbados’ debt will still be considered ‘speculative-grade’. More specifically, a ‘B’ rating corresponds to borrowers that S&P deems to be ‘more vulnerable to adverse business financial and economic conditions, but currently have the capacity to meet financial commitments’,” he explained.
The respected economist said should Government remain on track with its targets under the BERT plan, the rating itself “will not likely influence the Government’s interest costs in the near-term given their limited projected financing needs over the next four years”.
But the next major target for scrutiny, the economist suggested, were the ratings on the island’s foreign currency debt, which he said was likely to remain in default until negotiations were completed with external creditors.
“The pace of future rating upgrades on foreign currency debt will determine how quickly the Government can regain access to international capital markets should the need ever arise once the four-year Extended Fund Facility with the IMF is concluded,” said Lowe.
Government is hoping to complete negotiation with foreign-currency creditors by early next year.