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Fitch: Uruguay Sovereign Rtgs Lwrd to Near-Default on Announcement of Debt Exchange.

Business Editors

NEW YORK--(BUSINESS WIRE)--April 10, 2003

Fitch Ratings today lowered the ratings on Uruguay's long-term foreign currency debt to 'C' from 'CCC-' on the announcement of a comprehensive foreign currency debt exchange. Fitch deems this exchange to be a distressed debt exchange, as bondholders will suffer a loss in economic terms. Upon completion of the exchange, scheduled for May 15, Fitch Ratings will place eligible bonds, as well as Uruguay's foreign currency issuer rating, in a default category. The long-term local currency ratings remain at 'CCC-', as local currency obligations are not included in the exchange. The short term foreign and local currency ratings remain at 'C'.

The government of Uruguay announced today that it will exchange all of its foreign-currency denominated bonds outstanding for new bonds with maturities of at least five years longer. Although the 7.875% bonds due 2003 will be eligible for a marginal cash payment up front, as will non-collateralized Brady bonds, and certain other bonds will be eligible for marginal increases in coupons, the exchange imposes an unambiguous loss for all bondholders in present value terms. Furthermore, bondholders that elect not to participate in the exchange will face unfavorable exit amendments including the elimination of cross-default clauses on their existing contracts, the waiver of sovereign immunity on new bonds, and delisting the outstanding bonds from the Luxembourg and Montevideo Stock Exchanges. These changes to the original contract would appear to be permissible under existing bond contracts, given support from the majority of holders tendering bonds for the exchange, but would nonetheless be harmful to 'holdout' investors. Finally, the government has stated that if the exchange fails, Uruguay may not be able to continue to service its debt obligations, even during 2003, underscoring the government's financial distress.

Upon completion of the exchange, Fitch would lower the ratings on eligible bonds to a default 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. New securities issued as part of the exchange would be assigned a non-default rating based on Fitch's assessment of the likelihood of timely and complete payment, potentially at the 'B-' level, assuming that the new debt service burden resulting from the exchange is manageable in the context of a credible fiscal program and that other negative developments, including severe stress in the domestic banking sector, do not obtain. A final determination of the appropriate rating for the new bonds would be made when they are issued. Bonds eligible for tender in the debt exchange and not fully extinguished would likely be rated below the new issues on the expectation that the government would make a distinction in its willingness to pay new bonds before exchange-eligible bonds.

If the exchange is successful, Uruguay's liquidity position could improve considerably. Scheduled 2004 and 2005 amortizations would be due almost entirely to official creditors. These obligations would likely be refinanced, assuming IMF performance criteria are met, providing authorities with breathing room to make improvements to public finances and the country's competitiveness. Assuming a 90% pickup in the exchange, 2004 market amortizations would amount to 0.2% of GDP or 0.8% of government revenues. Market amortizations would remain very low through 2008, with the exception of approximately US$107 million in payments on bonds with original maturity in 2003 that would be extended to 2006. Total debt service, including repayments to multilaterals, would be considerably reduced, declining to 12% of GDP in 2004 from 25% in 2003 (equivalent to 39% of revenues in 2004 from 81% of revenues in 2003). All of the adjustment in debt service would come from lower scheduled amortizations because interest payments would not be substantially altered by the exchange.
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Publication:Business Wire
Geographic Code:3URUG
Date:Apr 10, 2003
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