Fitch Ratings, the UK-based international rating agency, announced it was soliciting market feedback and commentary on the implementation of Issuer Default and Recovery Ratings for sovereigns. As part of the continuing introduction of these ratings, the report details Fitch's plans to assign them for the 92 sovereigns it currently rates.
Fitch announced the launch of new recovery ratings (R ratings) and issuer default ratings (IDRs) on 26 July following extensive consultation with market participants and published its first recovery and issuer default ratings for US corporations on 9 August. The agency's Special Report, "Recovery Analysis and Sovereign Ratings", published as an exposure draft, is freely available on the Fitch Ratings website, 'www.fitchratings.com'.
It is not anticipated that the assignment of IDRs and 'R' ratings will lead to changes in ratings currently assigned to sovereign debt, with the possible exception of so-called 'Brady bonds', created in the early to mid-1990s in the aftermath of the 1980s Less Developed Country Debt Crisis. The credit quality of some of the Brady bonds was enhanced with principal and interest payments collateralized with specially created US Treasury bonds deposited with the New York Federal Reserve.
Despite this enhancement, Brady bonds are currently assigned the same rating as unsecured international sovereign bonds. However, subject to a review of the recovery rates on Brady bonds that were restructured as part of broader sovereign debt restructurings by Ecuador (2000), Uruguay (2003) and most recently Argentina (2005), it may be that the realization of collateral has resulted in above average recoveries on these bonds and hence may support a higher recovery rating and thus debt rating. Partially collateralized Brady bonds with a face value in excess of USD7 billion could be affected.
David Riley, Head of Sovereign Ratings at Fitch, said, "Brady bonds are declining asset class as sovereigns have been very active in recent times in retiring this debt that is a reminder of past defaults. But given that these bonds are partially collateralized with US Treasury bonds, arguably they are of better credit quality than other sovereign bonds and with Fitch's new recovery ratings, their ratings could better reflect this."
An innovation that will be particularly relevant for investors in sovereign debt securities is a new rating category of Restricted Default ('RD' rating). A sovereign issuer will be assigned an RD rating if it fails to make due payments on some but not all of its private and commercial debt. Currently, Fitch does not make a distinction between a default event that is partial and restricted to particular classes of sovereign debt, such as the Russian rouble crisis and default in 1998, from a comprehensive default across all debt instruments as was the case when the Argentine government announced a debt moratorium in December 2001.
Fitch has recently concluded an extensive consultation exercise on the role of recovery analysis in ratings, and this latest exposure draft Special Report is an opportunity for market participants with a particular focus on sovereign debt and ratings to comment further on the proposed approach. It is expected that the new approach will be implemented in the final quarter of 2005 following the conclusion of this consultation period on 30 September 2005.
Fitch announced the launch of new recovery ratings (R ratings) and issuer default ratings (IDRs) on 26 July following extensive consultation with market participants and published its first recovery and issuer default ratings for US corporations on 9 August. The agency's Special Report, "Recovery Analysis and Sovereign Ratings", published as an exposure draft, is freely available on the Fitch Ratings website, 'www.fitchratings.com'.
It is not anticipated that the assignment of IDRs and 'R' ratings will lead to changes in ratings currently assigned to sovereign debt, with the possible exception of so-called 'Brady bonds', created in the early to mid-1990s in the aftermath of the 1980s Less Developed Country Debt Crisis. The credit quality of some of the Brady bonds was enhanced with principal and interest payments collateralized with specially created US Treasury bonds deposited with the New York Federal Reserve.
Despite this enhancement, Brady bonds are currently assigned the same rating as unsecured international sovereign bonds. However, subject to a review of the recovery rates on Brady bonds that were restructured as part of broader sovereign debt restructurings by Ecuador (2000), Uruguay (2003) and most recently Argentina (2005), it may be that the realization of collateral has resulted in above average recoveries on these bonds and hence may support a higher recovery rating and thus debt rating. Partially collateralized Brady bonds with a face value in excess of USD7 billion could be affected.
David Riley, Head of Sovereign Ratings at Fitch, said, "Brady bonds are declining asset class as sovereigns have been very active in recent times in retiring this debt that is a reminder of past defaults. But given that these bonds are partially collateralized with US Treasury bonds, arguably they are of better credit quality than other sovereign bonds and with Fitch's new recovery ratings, their ratings could better reflect this."
An innovation that will be particularly relevant for investors in sovereign debt securities is a new rating category of Restricted Default ('RD' rating). A sovereign issuer will be assigned an RD rating if it fails to make due payments on some but not all of its private and commercial debt. Currently, Fitch does not make a distinction between a default event that is partial and restricted to particular classes of sovereign debt, such as the Russian rouble crisis and default in 1998, from a comprehensive default across all debt instruments as was the case when the Argentine government announced a debt moratorium in December 2001.
Fitch has recently concluded an extensive consultation exercise on the role of recovery analysis in ratings, and this latest exposure draft Special Report is an opportunity for market participants with a particular focus on sovereign debt and ratings to comment further on the proposed approach. It is expected that the new approach will be implemented in the final quarter of 2005 following the conclusion of this consultation period on 30 September 2005.