Jca’s debt obligation troubles credit agency

KINGSTON—Jamaica’s move to restructure its debt obligations through a national debt exchange has earned it a swift downgrade from the New York-based Fitch credit rating agency.
In a statement issued by the ratings agency, Fitch said the debt swap valued at approximately JAM $860 billion in foreign and local currency debt amounted to a “distressed debt exchange”, which “adversely impacts the original contractual terms of domestic bondholders.”

Fitch said it considers the debt exchange a default, hence, the sovereign’s foreign and local currency issue default ratings will be lowered to ‘Restricted Default’ upon completion of the exchange. The Jamaica government plans to close the exchange on Thursday. The exchange will affect some instruments which Fitch rates, and as a result the agency stated that both the sovereign foreign and local currency issue default ratings have been lowered to ‘C’ from ‘B-’ indicating that default on both types of debt instruments is highly likely in the near term. 

The debt swap entails extension of maturities and reduction in coupons for the affected debt instruments. Although the operation does not involve a ‘haircut’ on principal, the proposed exchange does imply an adverse change in the terms of government domestic debt. In addition, the exchange has been set as a precondition towards progress in finalising a new agreement with the International Monetary Fund (IMF). Fitch acknowledged that, in the absence of an IMF programme to stabilise investor confidence, Jamaica would likely face rising financing pressures and increased risks for macroeconomic stability. 

Although the operation does not directly involve international bonds, Fitch lowered the rating on Jamaican Eurobonds to ‘CCC’, stating that an unsuccessful debt exchange could result in increased financing pressures for sovereign debt. The country ceiling will be downgraded to ‘B-’. Capital controls or foreign exchange restrictions have not been announced. However, Fitch did state that Jamaica’s ratings will be raised out of default shortly after Fitch determines that the exchange has been successful, which is typically measured by a minimum participation rate of 90 per cent. “The new rating will be consistent with Jamaica’s prospective credit profile and debt structure,” stated the ratings agency.