It’s time to sort through the “junk” in your debt documents
by Clinton van Loggerenberg, Deborah Carmichael and Ghislaine
Published: June, 2017
Submission: June, 2017
Following downgrades by ratings agencies Standard & Poor’s (“S&P”) and Fitch in April 2017, Moody’s cut South Africa’s foreign and local-currency ratings to investment grade Baa3 with a negative outlook on Friday, 9 June 2017.
On 2 June 2017, S&P reaffirmed its 3 April 2017 decision to downgrade South Africa's foreign currency debt to “junk status” (BB+) (the colloquial term given to a non-investment grade rating), and retained a negative outlook on South Africa, saying that “weak economic growth and political uncertainty continued to pose risks to the rating”. Following shortly after this decision, S&P further downgraded South Africa’s banks to non-investment grade (BB+). This was in line with its rating of the country, as banks cannot be rated higher than the country’s foreign currency sovereign credit rating “because of the likely direct and indirect influence of sovereign distress on domestic banks’ operations, including their ability to service foreign currency obligations”, S&P said in a statement on 5 April 2017.
On 7 April 2017, Fitch downgraded South Africa’s unsecured foreign currency and local currency bonds to non-investment grade.
One question on everyone’s mind should be “what is the impact of the downgrade on my debt/loan documents?”. It is a good time for institutions to look at their debt documents to assess any such impact. Below is a list of key points to keep in mind (this list is non-exhaustive and may need to be adapted depending on the facts of the matter):
If the MAE event occurs, the lender may accelerate the loan and demand repayment. A ratings downgrade may be included in the loan agreement as a MAE event, thus triggering an earlier loan maturity date.
International Swaps and Derivatives Association Master Agreement
If you require any assistance with assessing and managing associated risks, please contact:
Clinton van Loggerenberg
banking and finance director cvanloggerenberg@ENSafrica.com cell: +27 82 526 2888
banking and finance director dcarmichael@ENSafrica.com cell: +27 82 787 9495
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