S&P updates ratings criteria on distressed exchange offers

By Susanna Moon

Chicago, Jan. 28 - Standard & Poor's said it published an update to its criteria for the ratings impact of distressed exchanges and other restructurings.

Companies in distress often restructure their obligations, offering less than the original promise, according to the report.

Investors may be motivated, at least in part, to accept the offer because they stand to fare even worse in case of a general default, S&P noted.

Such offers are treated analytically as the equivalent to a default, the agency said. Therefore, upon completion of an exchange viewed as distressed, S&P said it rates the affected issues D and the issuer credit rating is usually reduced to SD, or selective default, assuming the issuer continues to honor its other obligations.

The approach pertains to the restructuring of any financial obligation - debt security, loan or derivatives contract, the agency said. The restructuring may take the form of an exchange offer or renegotiation.

The agency said it expects a limited number of downgrades following the release of the criteria update as a result of the more explicit explanation that a distressed renegotiation of a derivative contract will be considered a default at the issuer rating level.

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