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Q&A: Government Support, Forbearance, And Corporate Liquidity Analysis In A Time Of Stress

Here, S&P Global Ratings provides answers, in summarized form, to common questions about how it considers government support, forbearance, and corporate liquidity in times of credit stress through the application of existing criteria, criteria guidance documents, and ratings definitions. This article, in question-and-answer (Q&A) format, therefore reflects S&P Global Ratings' current criteria, criteria guidance documents, and ratings definitions, as applicable.

The first section addresses our analytical approach to assessing forbearance and debt exchange offers, while the second section discusses our analytical approach to government support.

Please note that this Q&A document is neither criteria nor a criteria guidance document and is not a substitute for those documents. For more information on our methodology applicable to the questions addressed in this document please see the related criteria articles cited below and at the end of this Q&A document.

Our Rating And Default Definitions, Forbearance, And Exchange Offers

How does S&P Global Ratings define a default, including for exchange offers?

S&P Global Ratings considers that a long-term obligation is in default if it misses a scheduled payment, for any reason, unless we believe the payment "will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days," according to "S&P Global Ratings Definitions," published Sept. 18, 2019, on RatingsDirect. It is our opinion that a default has occurred if an issuer undertakes a distressed exchange offer restructuring. This can include a standstill or payment forbearance agreements unless we view that there is adequate compensation.

For more information on our analytical approach relevant to this question please see

  • S&P Global Ratings Definitions, published Sept. 18, 2019
  • Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
Under S&P Global Ratings' criteria, how might government support enable a rated entity to meets its financial commitments in full and on time?

We regard as a government-related entity (GRE) an entity:

  • That could, if under stress, benefit from extraordinary government support that could enhance the entity's capacity and willingness to meet its financial commitments as they fall due; or
  • That is controlled by a government that we believe could be subject to negative extraordinary government intervention if the government is under stress.

Government support may enable a rated entity to avoid a default if, for example, it is in the form of a liquidity injection that would allow the rated entity to pay down debt maturities in full by the due date, within five business days of the due date in the absence of a stated grace period, or within the earlier of the stated grace period or 30 calendar days.

On the other hand, a government may provide support to a rated entity that is insufficient to prevent a default if, for example, not enough support is provided or if it is provided too late to enable the entity to meet its financial commitments in full and on time.

For GREs, a key analytical consideration in determining whether government support could avoid a default is whether extraordinary support from the government to a GRE will be timely and sufficient to enable the GRE "to meet its financial commitments as they come due," according to "Rating Government-Related Entities: Methodology And Assumptions," (GRE criteria) published on March 25, 2015. We evaluate potential, as yet unrealized, extraordinary government support to GREs by applying our GRE criteria.

For more information on our analytical approach relevant to this question please see:

  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
How does S&P Global Ratings treat payment delays or forbearance?

We treat a delay of payment on a long-term obligation as a default, unless we expect payment will be "made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days." We treat a debt restructuring that we would consider to be distressed and below par as a default.

If a GRE receives forbearance on debt extended by its supporting government (or an arm of that government including government banks), such that interest is deferred or a principal repayment is extended and the debt is entirely owned by the government, a rating committee could consider that as an extension of government support and therefore might decide--based on the specifics of the case--to not consider that a default. This would be the case only if in our view this would not trigger cross-default clauses or acceleration of other debt. An entity can be classified as a GRE if we believe the entity could, under stress, benefit from extraordinary government support that could enhance the entity's capacity and willingness to meet its financial commitments as they come due. In a time of systemic stress, it is possible that entities could be newly considered as GREs, perhaps temporarily or over a longer period.

If a government were to mandate a payment holiday on debt owned or held by third parties and there were not "adequate compensation," for example an amendment fee or increased interest rate, that would typically be considered a default.

If a payment holiday on debt owned or held by third parties were to be part of a government support program, which is funded by the government, and if the support provided can be considered "extraordinary" as defined under our GRE criteria, we may analyze such a scenario through the application of our GRE criteria. We consider government support or negative intervention as "extraordinary" when it is temporary, entity specific, and often related to financial stress at the GRE.

If a lender (government or private) offers the possibility of a payment holiday or standstill agreement to unrelated entities (meaning, in the case of government lenders, that the entities are not GREs of the government that owns the lending bank or subsidiaries of the lending bank), we would typically analyze the impact of an entity availing itself of that benefit under the criteria "Rating Implications Of Exchange Offers And Similar Restructurings, Update," published May 12, 2009. We would consider factors such as whether any compensation would be adequate, how likely a conventional default would be, and the ability and willingness of the entity to make the payment in absence of the payment holiday or standstill agreement, among others.

For more information on our analytical approach relevant to this question please see:

  • S&P Global Ratings Definitions, Sept. 18, 2019
  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
  • Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
How does S&P Global Ratings gauge whether a debt exchange offer is tantamount to a default?

If a company makes a debt exchange offer, our criteria state that we would view that offer as tantamount to a default if:

  • The offer would give less value than the promise of the current rated debt, and
  • There is a realistic possibility of a conventional default.

S&P Global Ratings' criteria provide that the decision about whether to consider an offer as distressed can use the current ratings at the time of the offer, as well as rating outlooks or CreditWatch listings, as one consideration in making a decision about default. This is not the only consideration, however. Other factors that may be assessed include our expectations about the company's near- or intermediate-term cash flow, including working capital needs; and market signals, if available. We would also assess other relevant signals in the context of prevailing capital market conditions, such as market liquidity.

For more information on our analytical approach relevant to this question please see:

  • Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009
Under what circumstances might S&P Global Ratings place ratings on CreditWatch?

S&P Global Ratings places a rating on CreditWatch when it believes that the likelihood of a rating action within the next 90 days is substantial (at least a one-in-two likelihood). From time to time, there may be events or issues that present such significant uncertainty to creditworthiness, such that a rating is placed on CreditWatch without the need to assess this threshold of potential change.

Ratings may be placed on CreditWatch under certain circumstances, including for example:

  • When, in our view, an event or deviation from an expected trend has occurred or is expected, and when additional information is necessary to take a rating action.
  • When we believe there has been a material change in the performance of an issue or issuer, but the magnitude of the rating impact has not been fully determined, and S&P Global Ratings believes a rating change is likely in the short term.

For example, under circumstance No. 1, our rating on an issuer is typically placed on CreditWatch as the result of a merger, recapitalization, or unanticipated operating development. This could include, for example, an unanticipated operating development related to the coronavirus such that the issuer has had to curtail or temporarily suspend operations.

The resolution of a CreditWatch is completed as soon as S&P Global Ratings has received the necessary information and completed its analysis--typically within 90 days--unless the outcome of a specific event is pending.

Under circumstance No. 2, our ratings on a group of transactions may be placed on CreditWatch as the result of identified performance deterioration until we complete our analysis of the magnitude of the rating impact. S&P Global Ratings usually resolves the CreditWatch within 90 days. This could include an identified performance deterioration related to the coronavirus, such that a group of issuers within a particular industry segment have had to severely curtail or temporarily suspend operations.

If we have all the necessary information, we may revise a rating without having placed it on CreditWatch. We may also change a rating and place the revised rating on CreditWatch pending further review when we believe an event or situation may result in a further change in the rating over the very short term and still need more information to make that determination.

For more information on our analytical approach relevant to this question please see:

  • Use Of CreditWatch And Outlooks, Sept. 14, 2009

Analyzing Government Support And Our GRE Criteria

How does S&P Global Ratings incorporate actual and potential support in its corporate rating analysis?

Government support can be provided on an ongoing basis or on an extraordinary basis. To be incorporated into our corporate liquidity assessment, ongoing liquidity or funding support needs to be certain and timely; it also needs to be demonstrated by a track record and government policy--or by an agreed and established process and ongoing interactions by the government and government-owned or government-controlled funding bank(s) or agencies--to provide such liquidity or access to funding as required.

Although actual (received) support, such as liquidity and capital injections, is included directly in our liquidity assessment of rated corporate entities, potential extraordinary support (that is, support that has not yet been provided), is not included in our liquidity assessment of the rated corporate entity but could be incorporated into the rating through the application of our GRE criteria.

For more information on our analytical approach relevant to this question please see:

  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
  • Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
  • Corporate Methodology, Nov. 19, 2013
How can the government-related entity (GRE) classification change for a rated entity?

We can classify an entity as a GRE if we believe the entity could, under stress, benefit from extraordinary government support that could enhance its capacity and willingness to meet its financial commitments as they come due. In a time of systemic stress, it is possible that entities could be newly considered GREs, perhaps temporarily or over a longer period of time. In addition, for us to classify an entity as a GRE, government ownership or control is not required, though we would generally expect the absence of a government ownership interest to reduce the economic incentive of the government to support a GRE compared with a government-owned GRE. However, government control is required for us to consider an entity a GRE in cases of potential negative government intervention.

In addition, there may be entities that we do not classify as GREs, which nevertheless may benefit from one-time actual government support in a time of credit stress. We would factor any actual liquidity support into our corporate liquidity assessment. If we believe that such support would not be repeated, we would, however, not provide any GRE uplift in our rating on the entity.

For more information on our analytical approach relevant to this question please see:

  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
What are examples of ongoing and extraordinary support from a government to a rated entity?

The difference between what we term "extraordinary" and "ongoing" support (or negative intervention) is not always distinct. We consider government support, or negative intervention, to be "extraordinary" when it is temporary, entity specific, and often related to financial stress at the GRE or at the government level. Extraordinary government support is support that could enhance the entity's capacity and willingness to meet its financial commitments as they come due, thereby reducing the entity's likelihood of default. However, the following non-exhaustive list of examples provides some illustrative cases:

Ongoing support and ongoing negative intervention:

Examples of ongoing liquidity support.  

  • Access to preferential funding
  • Availability of centralized group liquidity resources
  • Conservative dividend policies and equity issuance flexibility
  • Existing guarantees or lines of credit
  • Committed capital or liquidity injection
  • Support of financial system

Examples of ongoing profitability and cash flow support.  

  • Recurrent operating or capital subsidies

Examples of ongoing negative liquidity intervention.  

  • High shareholder distribution policies
  • Unfavorable tax regime

Examples of ongoing negative profitability and cash flow intervention.  

  • Directives to provide loss-making goods and services

Examples of extraordinary support.  

  • Liquidity injections
  • Loans from the government or through government-owned banks
  • Recapitalizations
  • Arrangement of a solvency rescue package directly from the government or through other market participants
  • The government takes less and leaves more to the GRE for its own investment and debt-service needs

Examples of negative extraordinary intervention. 

  • Special taxes
  • Special dividends
  • Asset- or cash-stripping
  • Mandating support to or a merger with stressed entities
  • Other measures that the government may impose to divert GRE resources to the government

Historically, we have observed that the risk of negative intervention generally increases when a government is itself under financial pressure or already in default as it may impose measures to divert GRE resources to the government as its needs rise.

For more information on our analytical approach relevant to this question please see

  • Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015

Related Criteria

  • S&P Global Ratings Definitions, Sept. 18, 2019
  • Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
  • Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
  • Corporate Methodology, Nov. 19, 2013;
  • Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
  • Use Of CreditWatch And Outlooks, Sept. 14, 2009
  • Rating Implications Of Exchange Offers And Similar Restructurings, Update, May 12, 2009

Related Research

  • Our Definition Of Default In The Context Of The EBA Guidelines, April 1, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Peter Kernan, London (44) 20-7176-3618;
peter.kernan@spglobal.com
Sarah Sullivant, Austin + 1 (415) 371 5051;
sarah.sullivant@spglobal.com
Gregg Lemos-Stein, CFA, New York (1) 212-438-1809;
gregg.lemos-stein@spglobal.com
Marta Castelli, Buenos Aires (54) 114-891-2128;
marta.castelli@spglobal.com
Lapo Guadagnuolo, New York (1) 212-438-4828;
lapo.guadagnuolo@spglobal.com

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