This report does not constitute a rating action.

In this credit FAQ, we discuss what our definitions mean for debt exchanges, including emergence from default. Although our "Ratings Definitions," published on Dec. 2, 2024, apply to all asset classes, this FAQ is particularly relevant for sovereign issuers that are exposed to distressed exchanges. We note that the individual circumstances of debt exchanges vary and can cause different rating outcomes.

Frequently Asked Questions

How do you define issuer and issue credit ratings?

As per our "Ratings Definitions," an issuer credit rating (ICR) is "a forward-looking opinion about an obligor's overall creditworthiness. This opinion focuses on the obligor's ability and willingness to meet its financial obligations as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation."

On the other hand, an issue credit rating is "a forward-looking opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program."

What happens to the ICR and the issue rating in the case of a default?

We lower our long-term issue rating on an issuer's debt to 'D' if the issuer does not make the payment on an obligation on the due date, unless we believe the payment will be made "within the next five business days in the absence of a stated grace period or within the earlier of the stated grace period or the next 30 calendar days."

We lower our short-term issue rating on an issuer's debt to 'D' if the issuer does not make the payment on an obligation on the due date, unless we believe the payment will be made "within the next five business days."

We also lower the ICR to 'SD' (selective default) or 'D' if we consider that a sovereign has defaulted on one or all of its commercial financial obligations, whether long- or short-term, rated or unrated. We view a distressed debt restructuring as tantamount to a default and therefore lower both the issue rating and the ICR to 'SD' or 'D' if we assess a particular debt exchange as distressed.

Importantly, the above does not apply to official or bilateral debt in the case of sovereigns. We do not consider it a default when a government misses or cancels some or all its debt payments to another government or multilateral lending institution.

When do you consider debt restructuring to be distressed, as opposed to opportunistic?

Debt restructurings include exchanges, repurchases, and term amendments. Under our "Ratings Definitions" (see the section on distressed debt restructuring and issue credit ratings), we assess debt restructurings as distressed if they meet two conditions:

• Investors receive less than the originally promised amount; and
• In the absence of a debt restructuring, there is a realistic possibility of a conventional default on the debt over the medium term.

Regarding the second condition, if the ICR is 'B-' or lower, we would ordinarily view the debt restructuring as distressed. However, we analyze each transaction individually and would typically combine several considerations when assessing a debt restructuring as distressed. Among others, these considerations include:

• The original debt payment profile. The closer the timing of the transaction to the debt payment date, the higher the likelihood of a conventional default;
• The issuer's liquidity position, refinancing capacity, and debt pricing. Low trading prices on the run-up to the maturity date generally point to the market anticipating that the issuer's repayment capacity is constrained. Our assessment of the issuer's liquidity position, refinancing capacity, and alternative funding access can reinforce or mitigate constrained repayment capacity;
• The size of the transaction. A large debt exchange may indicate the need for a sovereign to release fiscal space to restore short- to medium-term sustainability; and
• The frequency of previous debt exchange transactions. At the lower end of the rating spectrum, continued recourse to debt exchanges may reflect the sovereign's limited ability to extend maturities and access the market. We may therefore consider that repeated exchanges, cumulatively, are distressed, even if the size of each individual exchange is modest.

Importantly, the fact that some debt holders may be willing to accept a debt exchange does not affect our assessment of whether the debt restructuring is distressed or opportunistic.

When do you typically raise the ICR from 'SD' or 'D' after a distressed debt exchange?

Typically, we raise an ICR from 'SD' or 'D' if:

• The issuer has resumed debt payments, meaning we no longer rate the debt at 'D'; or
• Terms that were amended become legally effective and we believe the issuer will not imminently default under the new terms.

However, even if the issue rating remains at 'D' because the issuer did not resume payments after the debt restructuring, we still may raise the ICR from 'SD' or 'D' if certain conditions are met. Fundamentally, we will only raise an ICR from 'SD' or 'D' if we expect no further resolutions and believe an upgrade better reflects our forward-looking opinion about the entity's creditworthiness. This means we raise ICRs from 'SD' or 'D' if we think the likelihood of the issuer defaulting over the near to medium term is lower than the alternative.

Does it matter if the distressed exchange includes a binding acceptance threshold?

Yes. Binding acceptance thresholds, which are common in collective action clauses (CAC), often provide more visibility on whether a restructuring plan will move forward. For instance, if the threshold is 75% and that number is met, the plan will proceed, which we can reflect in our rating.

The absence of a binding acceptance threshold reduces clarity and means that we must evaluate the risk of the restructuring process being reversed.

What are some key considerations you take if a binding acceptance threshold does not exist?

In a scenario where debt remains unpaid for some time, for instance because some debtholders rejected the exchange, we assess whether the holdout group could derail the ongoing restructuring process. If holdout groups do not take legal action as time passes and we become confident that the likelihood of them doing so is low, we could raise the ICR from 'SD' or 'D', while keeping the issue rating at 'D'.

We apply the same forward-looking approach to a scenario where some of the exchanged debt remains untendered. Where restructuring does not cover all defaulted obligations, what drives emergence from default is our role in being forward-looking and relevant to the market, in combination with our expectations that no further broad resolution of the outstanding defaulted obligations will occur and that the ability of debtholders with untendered debt to materially disrupt the issuer's financial ability is limited.

In both cases, the acceptance rate or a large proportion of single holdouts are relevant indicators of debtholders' capacity to harm a fluid restructuring process. Even if participation rates typically exceed 90% in the sovereign space, exchange offers rarely achieve acceptance rates of 100%. In the absence of a binding threshold, assessing the strength and cohesion of nonparticipating creditors therefore constitutes a key element in our analysis.

Notably, our forward-looking assessment is also holistic as it considers whether the ongoing restructuring process could contaminate other existing debt--for instance because cross-default or acceleration clauses are triggered--and precipitate the issuer's default.

To which rating category can you raise 'SD' or 'D' ICRs?

We can only raise 'SD' or 'D' ICRs to the 'CCC' category and above. We do not raise ICRs from 'SD' or 'D' if we believe a further default is virtually certain, which corresponds to our 'CC' rating, as per our "Ratings Definitions." If a default is not virtually certain, we raise the ICR to a level that is commensurate with our forward-looking view of the issuer's creditworthiness. In doing so, we consider the potential improvement in the issuer's debt sustainability that results from the debt relief associated with the distressed exchange.

How do you determine issue ratings on untendered debt?

We apply a similar forward-looking approach to our issue ratings. We believe there may be greater informational value in keeping a 'D' rating for the untendered bonds versus an 'NR', with the rating more appropriately reflecting the open-ended nature of a sovereign debt restructuring. This is particularly true when untendered debt is sizeable.

In our view, a 'D' issue rating also better incorporates the uncertainty on whether untendered debt will be serviced eventually, Analytically, we treat untendered debt as a contingent liability, and we would expect the 'D' rating to be adjusted upward should information emerge that indicates that this debt will be further serviced. Alternatively, even if there is no resolution through the courts or by the parties involved, we would eventually move the ratings to 'NR', based on the diminished prospects for any resolution and the lack of relevance of the 'D' ratings in the context of the market.

Do you apply the same approach to debt instruments that contain CACs?

Generally, no. CACs enable a contractually specified super-majority of bondholders, for example 75%, to agree on a revision to the payment terms that is binding for all bondholders, even for those who rejected it. We typically raise the ICR if we are confident that:

• The binding acceptance threshold is met;
• The resolution will apply to all debtholders; and
• The likelihood of another repurchase is remote.

We typically raise the issue rating once the amended terms become legally effective and if we assess that a default under the amended terms is not virtually certain.

Related Research

• S&P Global Ratings Definitions, Dec. 2, 2024
• Sovereign Rating Methodology, Dec. 18, 2017

Primary Contacts:	Valerie Montmaur, Paris 33144207375; valerie.montmaur@spglobal.com
	Lapo Guadagnuolo, London 44-20-7176-3507; lapo.guadagnuolo@spglobal.com
	Kenneth T Gacka, Seattle 1-415-371-5036; kenneth.gacka@spglobal.com
	Roberto H Sifon-arevalo, New York 1-212-438-7358; roberto.sifon-arevalo@spglobal.com