Fitch Ratings today downgraded the Dominican Republic's foreign currency issuer rating as well as the ratings on the debt eligible for the exchange to 'DDD' from 'C'. However, the long-term local currency rating has been placed on Rating Watch Positive in anticipation of the government's improved liquidity position as a result of the exchange.
The downgrade marks the completion of a comprehensive debt exchange, which Fitch deemed to be an event of default under its criteria for distressed debt exchanges. The government announced today that the exchange offer had achieved the required minimum participation level and that the exchange would therefore be completed. Of the US$1.1 billion in global bonds eligible for the exchange, slightly more than 90% was tendered. As local currency obligations were excluded from the debt exchange, the long-term local currency (Dominican peso) rating remains at 'CCC+'.
Ratings on the securities to emerge from the exchange will be formally rated when they are issued on May 11, and are likely to be rated in the 'B' category. In accordance with Fitch's practice in distressed debt exchanges, existing bonds would retain a default rating for at least 30 days. After 30 days, if the government is committed to continuing to pay principal and interest on any outstanding defaulted bonds according to their original terms, the ratings on these securities would be raised to a non-default rating to the extent that they are not fully extinguished through tenders.
As the results of the exchange imply a substantial improvement in the Dominican Republic's liquidity position, the long-term local currency rating has been placed on Rating Watch Positive. Scheduled amortizations through 2013 are almost entirely to official creditors. Most of the savings in 2005 comes from Paris Club debt relief (US$142 million) and the 100% capitalization of the remaining interest payments on the new bonds (US$46 million), as market amortizations, which amount to US$20 million, would remain unchanged as a result of the exchange. In 2006, the most significant savings would come from the five-year extension of the US$500 million maturity on the existing bonds. In light of stronger than expected fiscal results during the first quarter of this year, the public sector's total financing needs could be reduced to an estimated 4.2% of GDP in 2005 from 8.4% in 2004. As the new bonds begin to amortize in 2007, market amortizations would increase to US$119 million from US$20 million pre-exchange.