Fitch Downgrades Argentina and Colombia World Bank Deals.

Business Editors

CHICAGO--(BUSINESS WIRE)--Oct. 22, 2002

Fitch Ratings has downgraded the ratings on two transactions related to the World Bank's rolling guarantee program. Fitch downgraded Argentina's Series E and Series F $250 million zero coupon notes to 'CC' Rating Watch Evolving from 'B-' Rating Watch Negative. Fitch also downgraded Colombia's $750 million World Bank rolling guarantee-backed obligation to 'BB+' from 'BBB'. The sovereign long-term foreign currency rating for Argentina remains at 'DDD' and the long-term foreign currency rating for Colombia remains at 'BB'.

The downgrades resulted from the World Bank's October 15, 2002 announcement regarding the terms for reimbursement on the $250 million guarantee payment which had backed the Argentine Series D zero coupon notes. In order for the guarantee to roll to the Series E payment, Argentina would have to reimburse the World Bank within 60 days. The World Bank decision to extend the repayment period from 60 days to five years makes it unlikely that the guarantee will roll and effectively leaves the subsequent Argentine Series E and Series F naked to sovereign default risk. The Rating Watch Evolving status reflects that Argentina may reimburse the World Bank within the 60 day grace period. If this is the case, the Series E notes will be upgraded to 'AAA' and Fitch will further review the implications to the Series F notes at that time.

Technically the rescheduling announcement does not force Argentina into arrears with the World Bank because the bank has always reserved the right not to seek immediate reimbursement when it deems that it would not be in either the borrower's or bank's interests. Further, Argentina's delayed repayment does not create a cross default to other World Bank loans or jeopardize future lending disbursements. As such, there are no negative consequences to Argentina in relation to the announcement.

However, Fitch does view the World Bank's action as damaging to the value added by rolling guarantee programs. Fitch's rating action on the Colombian Notes reflects a concern that if a sovereign is in default, circumstances would often be sufficiently dire to warrant the World Bank providing similar leniency on the repayment of guarantees, furthermore this leniency creates an unfavorable precedent which dilutes the preferred creditor argument in relation to partial guarantees. Fitch believes the Colombian transaction merits 1 notch above the Colombian Long-term foreign currency rating as the structure covers two semi-annual debt service payments which will act as liquidity enhancement during times of distress.

While the recent actions were specific to Argentina and the World Bank, Fitch is concerned with the overall value of preferred creditor transactions in all countries. Specifically, Fitch will look closely at transactions involving preferred creditors such as IFC or IDB B-loan structures, where the preferred creditor halo has traditionally been expected to allow uninterrupted access to foreign exchange. While the preferred creditor argument held up reasonably well in Argentina as companies were able to receive preferential access to foreign exchange, the recent World Bank precedent could change the way sovereigns view the lender-of-last-resort threat and jeopardize future treatment during a severe sovereign crisis.

While the rolling-guarantee and the preferred creditor umbrella has been tarnished, Fitch will continue to give credit to other types of partial guarantees offered by the multi-nationals. Fitch believes these partial guarantees being offered will replace the rolling guarantee product and will offer investors a better means of protection as they will reduce either the probability or the severity of loss on an investment.