Standard & Poor’s Rating Services joined Fitch and Moody’s by lowering its long-term sovereign credit and senior unsecured debt ratings on the Dominican Republic to ‘CC’ from ‘CCC’. Standard & Poor’s also affirmed its ‘C’ short-term sovereign credit rating on the DR, with a continued negative outlook. According to credit analyst Richard Francis, the downgrade reflects the heightened probability of a default on debts due to the private sector now that the government is in discussion with the Paris Club to reschedule its debt service obligations to its bilateral creditors. “Given the general provisions of the Paris Club’s Evian Approach, this could imply that the government may be asked to seek comparability of treatment from its private creditors, under which it would have to reschedule all of its external debt,” said Francis. “The government is already in arrears to its bilateral creditors and to many of its suppliers,” he concluded.
Franco Ucelli of the Bear Stearns brokerage firm writes in his 2 February update on the DR that the “significance of the S&P announcement is that it elevated the issue of Paris Club comparability of treatment to the top of the list of reasons for default risk. He explains that while the Paris Club has guidelines, in the end, countries seeking debt service relief are dealt with on a case-by-case basis. “We still think the case for comparability of treatment in DR is weak, because Paris Club maturities that are likely to be rolled over would be those falling due in 2004 and 2005. The next bond maturity (aside from PDI amortizations which could be tricky) is 2006, which falls outside this period. Although DR has been missing payments to the Paris Club for several months, it is possible that this “past due interest” could be capitalized, raising the specter of comparability of treatment on bonds, but we think this is a stretch.”
Additionally, Ucelli reported that the S&P announcement may bring out sellers who have held on to Dominican bonds to sell.
Ucelli sums up in his last report that the DR is as close to a debt default as a country can get – it is currently using the 30-day grace period for the 23 January interest payment on its 2013 bond. He explains that lack of payment has been due to a severe liquidity and confidence crisis locally that is limiting the supply of dollars. Furthermore, he writes that the IMF is requiring the authorities to access dollars on the open market rather than using Central Bank foreign exchange reserves to remit payments to bondholders.
On the positive side, Ucelli reports that the Interamerican Development Bank could disburse a US$150-million loan this week and the IMF is set to make a first-review disbursement by 11 February if the government complies with prerequisites.