Fitch Ratings, an international credit rating company, Friday downgraded Cyprus's Long-term local currency Issuer Default Rating (IDR) to 'RD' ('Restricted Default') from 'CCC' following confirmation from the Cypriot government that the exchange of a number of domestic law government bonds has been completed.
The downgrade to 'RD' reflects Fitch's opinion that the exchange constitutes a distressed debt exchange (DDE) in line with its criteria and follows the downgrade of Cyprus's LC IDR to 'CCC' from 'B' on 3 June, said the London-based credit rating company in its press release.
Fitch has downgraded only the affected domestic bonds to 'D' from 'CCC' and affirmed the rest at 'CCC'. With foreign law bonds unaffected by the exchange, the Long-term foreign currency IDR has been affirmed at 'B-' with a Negative Outlook. The Short-term foreign currency IDR and the Country Ceiling have also been affirmed at 'B'.
Under the exchange, domestic law bonds with a total nominal value of 1 billion Euro that are due to expire within the EU-IMF programme period (from 2013 to the first quarter of 2016) will be replaced by new bonds with the same coupon rates but with the maturity dates of the new securities extended to outside the programme period, said Fitch.
"This transaction constitutes a DDE under Fitch's criteria, as the maturity extension at existing coupon rates represents a material reduction in terms for bondholders."
The settlement date for Cypriot-law exchanged bonds is Monday, 1st July. Shortly after completion of the debt exchange and the issue of new securities, Fitch will raise Cyprus's LC IDR out of 'RD' and assign ratings consistent with the agency's forward-looking assessment of Cyprus's credit profile following the distressed debt exchange.
The post- exchange LC IDR and securities' ratings are likely to be low speculative grade, added Fitch.