Fitch Ratings believes that a decision to seek debt restructuring under the Common Framework (CF) for Debt Treatment announced last November by the G20 and the Paris Club is unlikely to be compatible with a rating greater than “CCC”. This was reflected in our decision to downgrade Ethiopia’s rating to “CCC” from “B” / negative this month following its announced intention to seek treatment for cystic fibrosis.
Fitch’s sovereign ratings apply to borrowings from the private sector. Official bilateral debt relief, such as that provided under the G20 Debt Service Suspension Initiative (DSSI), does not constitute a sovereign default as defined by Fitch’s sovereign rating criteria. However, the Common Framework, unlike the DSSI, requires debtor countries to seek treatment from private sector creditors at least as favorable as that agreed with official bilateral G20 / Paris Club creditors.
Fitch would determine the rating implications of a private sector restructuring linked to the FC through the prism of the agency’s definition of a troubled debt swap (DDE). Fitch considers a restructuring to be a DDE, which constitutes an event of default, if there is a significant reduction in terms and the exchange is necessary to avoid a classic default. A restructuring of the private sector under the CF is likely to meet the criteria of these criteria.
There are still scenarios in which an intention to seek CF treatment might not result in private sector restructuring. G20 / Paris Club public sector creditors might, for example, make an exception to the private sector treatment requirement, or a sovereign might not follow through on a decision to seek CF treatment. Nonetheless, we do not consider exemptions for all private sector creditors to be likely, given that the G20 has repeatedly encouraged private sector participation in DSSI.
Further evidence that a state will have access to the FC treatment associated with private sector restructuring could lead to a downgrade to “CC”, meaning that a default is “likely”. The publication of a consent solicitation for bondholders could lead to a demotion to “C”, and its acceptance to a further shift to a restricted default, “RD”. The rating would be upgraded to a level reflecting its post-restructuring fundamentals shortly thereafter.
Source: Fitch Ratings