Above: Kingston (CJ Photo)

By the Caribbean Journal staff

Standard & Poor’s and Fitch have each downgraded Jamaica’s sovereign credit rating following the country’s announcement of a debt exchange offer on Monday night.

The moves came after Jamaica announced a domestic debt exchange offer valued at $9.1 billion USD ahead of the country’s potential deal with the International Monetary Fund.

S&P lowered its rating on Jamaica’s foreign and local currency sovereign credit ratings to “SD” from “B-/B.”

The firm also lowered the ratings on government securities not included in the debt exchange offer to “CCC.”

The offer “includes foreign currency-denominated debt that was issued locally, which carries foreign currency ratings, which is why we have lowered the foreign currency credit rating to ‘SD,'” S&P said in a statement.

Fitch downgraded the firm’s long-term foreign currency and local currency issuer default ratings to “C” from “B-,” and lowered its short-term foreign currency rating to “C” from “B.”

“In Fitch’s opinion, the exchange, if completed, would constitute a ‘distressed debt exchange’ (DDE) in line with its criteria, as the operation adversely impacts the original contractual terms of domestic bondholders,” the firm said.

Fitch said both ratings moves indicated that “default on both types of debt instruments is highly likely in the near term.”

“Fitch considers that Jamaica’s proposed domestic debt exchange will, if completed, constitute a default,” it said. “Hence, the sovereign’s FC and LC IDRs will be lowered to ‘Restricted Default’ (RD) upon completion of the exchange. The government plans to close the exchange on Feb. 21, 2013.”

S&P said the debt exchange is considered a default for two reasons: one, that the offer implies that “investors will receive less value than promised as per the original securities,” and two, that the firm views the offer as “distressed rather than opportunistic because the issuer does not intend to fulfill its original obligations.”

Jamaican last undertook a debt exchange offer in January 2010, when S&P also lowered its credit rating to “SD.”

S&P firm said it expected to assign a new credit rating in the “CCC” category to the new bonds upon the completion of the debt exchange and the issuance of the new bonds, which is set for later this month.

Fitch said that “Jamaica’s ratings would be raised out of default “shortly after Fitch determines that the exchange has been successful, which is typically measured by a minimum participation rate of 90 percent.”

Despite the debt exchange, Jamaica’s general government debt burden will “remain high,” S&P said, at 115 percent of GDP in 2013.