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Local Government Debt 2021: China's Dominance Overshadows Borrowing Capacity In Other Emerging Markets


COVID-19 Impact: Key Takeaways From Our Articles


Global Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date In 2021


Non-U.S. Local Governments: To What Extent Did Sovereign Support Offset The Pandemic Downdraft?


Local And Regional Governments Midyear Outlook 2021: Sovereign Support And Market Access Anchor Credit Quality

Local Government Debt 2021: China's Dominance Overshadows Borrowing Capacity In Other Emerging Markets

This report does not constitute a rating action.

S&P Global Ratings projects that borrowing of subnational governments' in emerging markets will remain at historically high levels in 2021-2022. On a net basis (excluding refinancing) we expect local and regional governments (LRGs) in emerging markets will borrow more than $600 billion annually in 2021-2022, after a peak of over $800 billion in 2020. Rising debt financing needs and still large fiscal deficits will likely keep annual gross subnational borrowing in emerging markets well above US$1 trillion (see chart 1).

Chart 1


Subnational borrowing soared last year because of Chinese and Indian LRGs' aggressive countercyclical fiscal policies as they largely adhere to pre-pandemic capital programs amid diminishing revenue. Emerging market subnational borrowing will spread in the next two years, however, because, although Chinese and Indian LRGs are set to reduce funding needs from the peak in 2020, we anticipate subnational governments in other emerging markets will raise their borrowing requirements in 2021.

  • We assume that debt restructuring will triple Argentine provinces' annual borrowing.
  • LRGs in Central and Eastern Europe will likely raise more debt to co-finance the completion of EU-sponsored projects.
  • The depletion of cash reserves in 2020 will cause Russian regions to return to the debt markets, including the city of Moscow, which for the first time in the last 10 years is planning a large borrowing program.
  • In other emerging markets, with the exception of Brazil and Nigeria, we expect organic growth of borrowing, largely due to persistent infrastructure needs.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects.   Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Chinese Provinces And Indian States Will Continue To Dominate Subnational Borrowing In The Emerging Markets

Although global subnational borrowing will expand, based on our calculations, Chinese provinces and Indian states will make up more than 90% of gross borrowing in 2021-2022 (see chart 2). The leading role of these two countries is based not only on the relative size of their populations, but also the level of decentralization of spending responsibilities. The share of subnational spending in general government spending reaches a high 65% in India and 90% in China.

Chart 2


Most subnational governments in emerging markets remain disconnected from the international capital markets.  Outside China and India they borrow predominantly from local banks or their central governments and their agencies, except for Argentinian provinces and a few Central and Eastern European (CEE) entities, which have experience in placing bonds in foreign currency or borrowing from multilateral institutions. Central banks and state-owned commercial banks still play the leading role in the development of domestic municipal bond markets in most emerging countries.

Despite the projected increase in borrowings, we believe that many LRGs in emerging markets underutilize their borrowing capacity and in doing so constrain their ability to increase investments in local infrastructure.   In most countries, consolidated subnational debt stock remains below what we see as a moderate 60% of LRG revenue. If all local governments lifted their debt burdens to this level, we estimate they could raise an additional US$335 billion. Decentralization could lead to a larger role of LRGs in public finances outside of traditional federal countries and China, and that could also in turn increase borrowing capacity. However, limited development of domestic capital market infrastructure, generally low predictability and transparency of fiscal policy, and largely inefficient equalization systems hinder increased subnational borrowing in emerging markets.

Subnational Governments' Focus On Post-Pandemic Economic Recovery Will Encourage Elevated Borrowing

Similar to their peers in developed federal countries, regional governments in China and India adopted countercyclical fiscal policies to support ailing local economies during the pandemic.  And although in the next two years we anticipate some reduction in debt intake in these countries compared with the record levels of 2020, global annual subnational borrowing will remain significantly higher than before the pandemic. This is because central governments in many other developing countries possess limited fiscal firepower and will be unable to provide massive support to LRGs, while the lingering pandemic continues to reduce budget revenue. LRGs' dependence in Brazil, Colombia, Mexico, and Russia on tax proceeds from volatile commodity sectors could make the recovery path uneven. Moreover, still high infrastructure needs and a strong demand for social assistance amid likely lower transfers from the central government budgets will keep subnational borrowing at elevated levels across emerging markets over the next two years.

Table 1

Emerging Markets Subnational Borrowing
Gross Borrowing (bil. US$) Debt stock (bil. US$)
2015 2016 2017 2018 2019 2020 2021 2022 2022
Argentina 5.2 11.8 13.3 5.8 3.3 3.5 10.3 3.4 24.3
Bosnia and Herzegovina 1.0 0.8 0.2 0.9 0.8 1.9 1.3 1.2 8.4
Brazil 6.9 6.7 6.7 4.9 5.1 7.4 4.7 4.6 224.7
Bulgaria 0.2 0.1 0.1 0.1 0.1 0.3 0.2 0.2 1.4
China 585.4 912.2 644.8 635.4 631.5 898.3 943.9 896.8 4,651.6
Colombia 0 0 0.4 0.8 1.1 0.8 1.1 1.0 6.6
Costa Rica 0 0 0 0 0 0.1 0.1 0 0.3
Croatia 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.2 1.0
Czech Republic 0 0 0.2 0.1 0.3 0.3 0.3 0.2 3.8
Guatemala 0 0 0 0 0 0.1 0 0 0.2
India 44.5 57.0 65.0 68.7 90.0 152.3 134.4 124.8 900.9
Indonesia 9.0 7.7 6.5 6.8 4.8 5.0 5.3 5.7 4.0
Jordan 0 0 0 0 0 0 0 0 0.1
Kazakhstan 0 0 0.5 0.8 0.8 1.9 2.0 2.2 5.5
Latvia 0.2 0.1 0.2 0.3 0.6 0.1 0.1 0.1 2.2
Mexico 5.1 4.1 6.2 6.5 3.8 4.7 6.3 4.8 34.6
Morocco 0.2 0.2 0.4 0.4 0.5 0.3 0.2 0.3 2.7
Nigeria 6.9 5.6 4.1 3.9 3.4 5.9 4.5 4.4 19.2
North Macedonia 0 0 0 0 0 0 0 0 0.0
Pakistan 0 0 0.8 0.1 0 0 0 0 0.3
Philippines 0.3 0.3 0.2 0.3 0.3 0.3 0.3 0.3 2.4
Peru 0.3 0.3 0 0.4 0.2 0.6 0.3 0.3 1.4
Poland 1.6 1.5 2.2 4.5 4.2 9.5 9.0 4.5 32.6
Romania 0.3 0 0 0.1 0.1 0.1 0 0 3.8
Russia 11.9 12.3 12.2 6.9 5.0 11.1 11.1 8.2 43.6
Serbia 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.7
South Africa 0 0.6 0.6 0.7 0.6 0.7 0.6 0.5 4.8
Turkey 0 0 6.3 6.8 3.3 4.7 4.8 4.2 17.8
Ukraine 0 0 0.2 0.2 0.2 1.1 1.0 1.0 3.1
Vietnam 0 0 0 0.1 0.1 0.7 0.8 0.9 2.6

Chinese provinces and special municipalities, as Tier 1 LRGs, are the only subnational governments in China allowed to raise commercial debt.  We expect the borrowing of Chinese provinces and special municipalities will remain high throughout 2021-2022 owing to still large deficits and rising refinancing needs. Although we expect annual borrowing to reduce from the peak level of 2020, on average it will still be about 50% higher than in 2017-2019. As a result, Chinese Tier 1 LRGs' borrowing will consistently exceed the previous peak of 2016, when the subnational governments implemented the largest part of the debt swap program with their local government financial vehicles (LGFVs). High investment in local infrastructure projects, coupled with the policy direction of reducing LRGs' dependence on off-budget activities, will result in consistently large deficits and spur bond issuance. The proceeds of these bonds will cover both the infrastructure funding gap left by LGFVs' less-pronounced borrowing activity, as well as rising refinancing of bonds coming due. We see a low chance, however, of China's LRGs being able to quickly reduce their dependence on off-budget borrowing. We believe most its Tier 1 LRGs will generally roll over their bonds by tapping China's capital market. Chinese investors appear supportive of holding municipal bonds, especially in times of heightened market volatility. Moreover, Chinese LRGs could increase borrowing further if they undergo a second debt swap with LGFVs.

Indian LRGs largely follow Chinese peers in their focus on infrastructure spending.   We estimate they will, however, decrease their borrowing in 2021-2022, due partly to an anticipated economic recovery in the country. We believe that increasingly risk-averse investors might have little appetite for subnational debt beyond already approved quotas. We anticipate states' own sources relative to expenditure will continue to fall short during the post-pandemic recovery. We expect the central government will remain supportive and provide assistance, but from a more stretched fiscal position. Indian states will maintain high expenditure because of necessary social spending, especially on health care, and efforts to go paperless.

We now expect a moderate uptick in Mexico compared with our previous expectation for deleveraging in 2021.   Mexican states will respond to ongoing budgetary pressures by raising short- and long-term debt in 2021 after years of a declining trend in terms of national GDP. We also expect loans structured by the central government to be transferred to LRGs to compensate for budgetary shortcomings.

After a several years of trending downward, Russian regions' borrowing is set to rebound strongly.   Although we project Russian LRGs will reduce their deficits in 2021 from the record levels posted in 2020, much-reduced cash reserves will drive regions, including the city of Moscow, to the debt market.

Infrastructure needs will likely spur subnational borrowing.   LRGs in CEE will need to implement remaining capital projects from the previous seven-year EU cycle. We anticipate that borrowing will subside starting from 2022. In Ukraine, decentralization, culminated by recent municipal election, has created growth momentum for municipal issuance. Turkey, Indonesia, Kazakhstan, Pakistan, Philippines, and Vietnam will increase their debt uptake, but from a relatively low starting point.

We anticipate an extraordinary increase in borrowing in Argentina, where provinces are restructuring their debts.   The largest issuer, the Province of Buenos Aires, is currently looking to exchange all its international bonds, with an outstanding face value of $7.1 billion. We estimate Argentine LRGs' gross borrowing will surpass $10 billion in 2021, although after debt exchanges, net borrowing should not exceed 2020 levels. Provincial governments in Argentina are at various stages of restructuring after the default of the sovereign and tighter capital controls, reflected in ratings at 'CCC+', 'CC', and 'SD'.

Contrary to the broad global trend, we expect states in Brazil and Nigeria to reduce borrowing in 2021-2022 as national authorities see the sectorwide LRG debt burden as unsustainable and take actions to reduce it.   In Brazil some large and highly indebted states are entering a fiscal consolidation agreement with the national government, aiming to tackle expenditure rigidities. The framework, in addition to significant support from the central government improving the LRGs' debt limits, could allow them to start borrowing again. Risks of monetary tightening are contained, given that most of the financing should come from the national government's own financial institutions, granting loans with some preferential treatment considerations. Our baseline expectation in Brazil is a plateauing of regional borrowing, as well as a fiscal package that includes the possibility of debt renegotiation, mostly with public banks and multilateral institutions (MLIs).

We think Nigerian states will likely benefit from higher oil prices increasing their revenue, but they may also need to take proactive actions to cut their expenses, thus narrowing future funding needs. This is because their indebtedness is already extremely high, such that borrowing capacity is squeezed.

Subnational Governments In Emerging Markets Remain Disconnected From The International Capital Markets

Across emerging markets, LRGs face severe limitations on debt uptake.   Most of them must rely on their sovereign governments providing direct lending from its budget or onlending of loans from MLIs, or on state agencies and state-owned or national banks (see chart 3). Access to international capital markets not only broadens the investor base; it also creates a solid incentive for governments to improve transparency and predictability of financial policy. The issuance of foreign currency bonds, though, exposes borrowers to the volatility of domestic currency exchange rates, which should be managed carefully to avoid undue pressure on local finances.

There are no emerging market subnationals that regularly tap international capital markets.   Argentinian provinces used to issue bonds in foreign currency, although their access to international capital markets has greatly diminished since 2018. Now, many of them are restructuring debt following the default of the sovereign and tighter capital controls. Besides them, some European LRGs, such as the cities of Bucharest, Zagreb (via Zagrebacki Holding), Moscow, Prague, and Warsaw, have sporadically issued Eurobonds. Chinese provinces can issue bonds in international markets via LGFVs, although they are gradually shifting their focus to direct domestic bond issuances. Johannesburg in South Africa has also used a special arrangement to issue external bonds. The Indian state of Kerala tapped international markets with a masala bond (rupee-denominated debt issued to offshore investors).

Domestic bonds are allowed in most countries, but they are rarely used outside of China and India, due to limited depth of local capital markets and meagre transparency and predictability of local governments' fiscal policy.   Domestic municipal bond markets are not free from state authorities' influence. State-owned and policy banks play a substantial role in developing China's municipal bond market and the Reserve Bank of India settles all state bonds in India. To our knowledge, emerging markets have not adopted public sector financial agencies, which help to connect small public sector entities with the capital market through repackaging small loans into large bond issues.

We anticipate international investors will regain interest in emerging market subnational borrowers in 2021-20221.   In December 2020 Istanbul placed a US$580 million Eurobond for the first time in a decade to finance the metro extension project. We assume that Argentine provinces will restructure most of their debt this year, which we believe will result in a surge of new bond issuance. Moreover, for the first time since 2010, Moscow plans to issue up to US$4 billion in domestic bonds, which have in the past been popular among international investors. The volume of municipal bonds issued in Kazakhstan, India, and Vietnam is also growing.

Chart 3


Although Subnational Debt In Emerging Markets Will Reach New Highs, Borrowing Remains Underutilized

Despite sizable projected borrowings, we estimate that LRGs in most emerging markets have greater borrowing capacities, given that sectorwide indebtedness remains relatively low apart from those in a few large countries.   Most emerging market LRGs' debt levels remain below 60% of total revenue, which is a level we consider quite low in an international comparison. We think that this mirrors their fairly low participation in their respective sovereigns' expenses (see chart 4), as well as direct and indirect restrictions imposed on either their budgets, debt levels, or type of debt at the subnational level (see table 2).

We think that LRGs in China, India, and Bosnia and Herzegovina can afford a higher debt burden, because they have access to very deep and reliable sources of funding that enable them to manage their debt burdens adequately.   Chinese provinces can place bonds among a large pool of predominately public domestic investors within a quota annually defined by the sovereign authorities. Indian state bonds are served by the Reserve Bank of India, which is supposed to settle payments to investors before claiming debts from the issuers.

Bosnia and Herzegovina is divided into two second-tier governments: the Republic Srpska and the Federation of Bosnia and Herzegovina (FBiH), with Brcko District still under international supervision. Republic of Srpska and the FBiH execute nearly all of general government expenses and carry the vast majority of the sovereign's debt. They also maintain strong access to international development institutions and global capital markets via the sovereign.

At the same time, states in Brazil and Nigeria might struggle to manage their debt burdens and we expect annual borrowing to decrease in both countries over the next two years as a consequence.

Chart 4


ARG--Argentina; BIH--Bosnia and Herzegovina; BRA--Brazil; BRG--Bulgaria; CHN--China; COL--Colombia; CRI--Costa Rica; HRV--Croatia; CZE--Czech Republic; GTM--Guatemala; IND--India; IDN--Indonesia; JOR--Jordan; KAZ--Kazakhstan; LAT--Latvia; MKD--North Macedonia; MEX--Mexico; MOR--Morocco; NGA--Nigeria; PAK--Pakistan; PHL--Philippines; PER--Peru; POL--Poland; ROU--Romania; RUS--Russia; SRB--Serbia; ZAF--South Africa; TUR--Turkey; UKR--Ukraine; VNM--Vietnam.

Subnational governments face restrictions on types and amounts of debt they can issue or borrow:
  • Direct restrictions, include individual quotas on annual debt intake;
  • Bans on foreign currency denominated debt;
  • Approval on all or some debt;
  • Indirect limits via restrictions on deficit/debt service/debt burdens; and
  • Many countries in emerging markets require subnational governments to maintain balanced budgets.

All these restrictions, however, have local peculiarities and can vary according to domestic accounting terms, which in some cases makes them aspirational or even redundant. If LRGs pursued their implied capacity to borrow, we think they could absorb an additional US$335 billion in 2022. In absolute terms, Russian, Indonesian, and Mexican governments have the largest borrowing capacity.

We think this additional debt intake is feasible in most countries, despite local restrictions, because most countries limit debt stock to no more than 60% of revenue, or link it to other measures, such as debt service as a percentage of revenue, which is less restricting if structured accordingly. Some outliers are Croatian subnationals which are limited to debt intake of only 3% of revenue for example, or Serbian LRGs, which must keep debt lower than 50% of revenue. In Guatemala, the requirement to have bank loan maturity of less than four years could put pressure on liquidity.

If decentralization in emerging market countries picks up, LRGs may also obtain additional capacity to borrow. This would result in additional responsibilities, but also mean some increase to revenue and budget volumes, which could then translate into additional borrowing capacity.

Chart 5


Table 2

Emerging Markets LRG Borrowing: Appendix
Country Foreign currency borrowing Bonds Restrictions on debt burden Central government approval on borrowing Restrictions on deficit


Yes, but no FX debt increase since Dec. 2020 (MLI loans excluded) Yes Annual debt service <15% of operating revenue net of transfers to municipalities Yes, for all debt Operating expediture growth is limited to revenue growth/inflation

Bosnia and Herzegovina

Yes Yes No Yes, all MLI funding is done via the CG No


Yes Yes, minor use Net consolidated debt <200% of net revenue (for states); 150% (for municipalities) No No


Yes Yes, minor use Annual debt service <15% of own revenue and general subsidy No No


No Yes, only for Tier 1 CG defines annual net borrowing quota and debt stock for Tier 1 LRGs No Indirectly, via borrowing quota


Yes Allowed, but non-existent Debt stock<80% of operating surplus; interest<40% of operating revenue Yes, for external borrowing Balanced budget

Costa Rica

Yes Allowed, but non-existent No Yes, for all borrowing Balanced budget


Yes Allowed, but non-existent Annual debt service <20% of revenue; annual consolidated borrowing <2% of consolidated revenue Yes, for all borrowing Balanced budget

Czech Republic

Yes Yes Debt stock <60% of total revenue (guideline) Yes, for bonds No


Allowed, but non-existent Yes Bank loan maturity 4 years Yes, for CG guaranteed debt No


No Yes No Yes, via RBI for bonds LRG deficit <3% of GDP (indicational, not enforced recently)


No Allowed, but non-existent Debt to GDP <60% Yes, for bonds LRG deficit <3% of GDP


No Yes CG annually defines debt stock quota for LRGs Yes, for all borrowing No


Yes, but de-facto non-existent since 2008 Allowed, but non-existent CG defines annual gross borrowing quota for LRGs Yes Indirectly, via borrowing quota


No Yes Individual net borrowing ceiling <15% of discretionary revenue No Balanced budget


Yes Allowed, but non-existent No No Balanced budget


Yes Yes Bonds are allowed when debt stock <50% of revenue and any monthly debt service <40% of monthly revenue Yes, for external borrowing No

North Macedonia

Yes Allowed, but non-existent Debt stock <30% of revenue; debt stock <100% of revenue Yes, for all borrowing No


No No Bonds are allowed when debt stock <50% of revenue Yes, only budget loans are allowed No


No Allowed, but non-existent Debt service <20% of revenue Yes, for external borrowing No


Yes, only CG guaranteed MLI loans Yes Debt stock <100% of revenue Yes, for all borrowing Balanced budget


Yes Yes Annual debt service <operating surplus plus asset sales No No


Yes Yes Annual debt service <30% own revenue No Balanced budget


de-facto No Yes Debt stock <100% of own revenue; annual debt service <20% of own revenue plus non-earmarked grants; interest <10% of expenditure Yes, for bonds Deficit <15% of own revenue


Yes Yes Debt stock <50% of revenue; Annual debt service <15% of revenue No No

South Africa

Yes, for special projects Yes No Yes, for external borrowing Balanced budget


Yes Yes Debt stock <150% of revenue Yes, for borrowing >10% of revenue No


Yes Yes Debt stock plus guarantees <200% (400% for Kyiv) of development budget revenue Yes, for all borrowing No


No Yes Debt stock <90% of own revenue Yes, for all borrowing Balanced budget
FX--Foreign currency. MLI--Multilateral institution. CG--Central government. RBI--Reserve Bank of India. Sources: S&P Global Ratings

Countries Covered In This Report

Our survey on Emerging Markets LRG borrowing encompasses 30 countries: Argentina, Bosnia and Herzegovina, Brazil, Bulgaria, China, Colombia, Costa Rica, Croatia, Czech Republic, Guatemala, India, Indonesia, Jordan, Kazakhstan, Latvia, Mexico, Morocco, Nigeria, North Macedonia, Pakistan, Philippines, Peru, Poland, Romania, Russia, Serbia, South Africa, Turkey, Ukraine, and Vietnam. We consider this sample as representative of emerging markets' LRG debt. We have also published separate and more detailed analyses of projected borrowing in the LRG sectors of various regions (see the Related Research section below).

We base our survey on data collected from statistical offices, as well as on our assessment of the sector's borrowing requirements and outstanding debt, which includes bonds and bank loans. The reported figures are our estimates and do not necessarily reflect the LRGs' own projections. For comparison, we present our aggregate data in U.S. dollars.

Related Research

Primary Credit Analysts:Felix Ejgel, London + 44 20 7176 6780;
Noa Fux, London + 44 2071 760730;
Celia Franch Lopez, London + 44 20 7176 0100;
Secondary Contacts:Alejandro Rodriguez Anglada, Madrid + 34 91 788 7233;
Susan Chu, Hong Kong (852) 2912-3055;
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Sarah Sullivant, Austin + 1 (415) 371 5051;
Additional Contacts:Wenyin Huang, Beijing (86) 10-6569-2736;
Omar A De la Torre Ponce De Leon, Mexico City + 52 55 5081 2870;
Yotam Cohen, RAMAT-GAN;
Carolina Caballero, Sao Paulo + 54 11 4891 2118;
YeeFarn Phua, Singapore + 65 6239 6341;
Alex Lam, Hong Kong + 852 2533 3552;
Constanza M Perez Aquino, Buenos Aires + 54 11 4891 2167;
Raphael Mok, Singapore (65) 6597-6167;
Victor C Santana, Sao Paulo + 55 11 3039-4831;

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