New S&P Methodology Confuses

S&P’s new global recovery ratings scale, designed to help investors better determine their probability of recovering investments during a sovereign default, has ended up confusing the market. Participants on a conference call to explain the new methodology questioned S&P analysts repeatedly on whether Colombia was now an investment grade credit. They also questioned the assumptions made on the new numeric ratings that predict investors in Colombia foreign currency debt have a higher probability of recovering their money than holders of Brazilian or Peruvian foreign debt. S&P analysts say Colombia is still a BB+ credit, one notch below investment grade, but outstanding foreign currency senior unsecured debt is now rated Triple B minus, which is investment grade. Peru’s foreign currency issuer rating is BB plus, like Brazil. Its numeric recovery rating is 2 compared to 3 for Brazil and Peru. S&P assigned recovery ratings on a numerical scale from one plus for the best expectations of recovery to six for the worst on foreign currency unsecured debt of 25 speculative grade issuers. S&P believes that in the event of default, investors would stand to recover between 70%-90% of their investment, while investors in Brazil and Peru in category 3, would only recover between 30% and 50%. John Chambers, chairman of S&P’s sovereign rating committee, notes the strength of Colombia’s institutions, its strong record of repayment and its increasing issuance of local currency obligations as reasons for the higher recovery rating.