Receive free Emerging markets updates
We’ll send you a myFT Daily Digest email rounding up the latest Emerging markets news every morning.
Credit ratings are hard. There will always been room for disagreement, and no shortage of people saying you’re “bizarre and inept” whatever the outcome. But surely an actual default is pretty black and white?
Not always, actually, as Cameroon proves.
Here’s a release from Standard & Poor’s declaring the country in “selective default” for one symbolic day, over a late payment on some commercial debt last year. (HT M&G’s Gregory Smith):
Between January and November 2022, Cameroon’s government made late payments on long-term, foreign currency (FC) commercial debt constituting a selective default (SD) according to S&P Global Ratings’ definitions.
As a consequence, we have temporarily lowered our FC sovereign credit ratings on Cameroon to ‘SD/SD’ from ‘B-/B’.
The missed payments have been cured and Cameroon is reportedly current on all commercial debt service obligations. According to our processes, we will wait one business day and then raise the long- and short-term FC sovereign credit ratings on Cameroon, most likely to ‘CCC+/C’.
We also lowered our local currency (LC) sovereign credit ratings on Cameroon to ‘CCC+/C’ from ‘B-/B’. The outlook on the LC long-term rating is stable.
Basically, it looks like Cameroon had borrowed money from Deutsche Bank Spain, and between January and November 2022 missed some payments by up to 18 days. This was only communicated to the rating agencies in July 2023. We’ll update with anything we hear from DB about the matter.
S&P says Cameroon also made some late payments on some “noncommercial, bilateral creditors” — we’re guessing some national or supranational development banks — but that it doesn’t classify this as a default under its criteria.
However, missing commercial debts by more than five days can qualify. From S&P’s definitions:
A short-term obligation rated ‘D’ is in default or in breach of an imputed promise. For non-hybrid capital instruments, the ‘D’ rating category is used when payments on an obligation are not made on the date due, unless S&P Global Ratings Maalot believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to ‘D’ if it is subject to a distressed debt restructuring.
Interestingly, Moody’s didn’t declare Cameroon in default for a symbolic day when it learned about the missed payments in late July, even if it did consider it to be “an incident of default”. Instead, it just downgraded its rating to Ca1 on the “emergence of cash management and liquidity challenges”, which is fair enough.
Does it matter? Well, not really. It’s not even the first country to be declared in default for a few days. But Cameroon’s 2025 dollar bond is trading at a yield of 12.5 per cent — not far from its march 2020 peak — indicating that investors do see a risk of an accident before it comes due.
Read the full article here