Gulf Finance House - S&P Ratings: The "Fix" Was In?

A second look at the recent ratings action.   

Was there a bit more here than met the eye at first glance?

Let's go back to S&P's happier ratings announcement of 3 March when it upgraded GFH to CCC-.  Like all things happiness is relative.  When you're SD, an upgrade to CCC- is an improvement.

Here's what S&P had to say in its Outlook.

The negative outlook reflects our opinion of GFH's very weak liquidity position from a rating standpoint, because it still faces challenges to meet debt repayments coming due in the very near term. It also reflects the uncertainty we perceive regarding the ability of the institution to implement its plan for improving its liquidity position and boosting its revenues.  Failure to meet any of the upcoming existing or restructured payments would lead us to lower the ratings to 'D' (default).   In addition, we would consider as another distressed restructuring any transactions by GFH to reschedule or restructure its debt, including unrated obligations, such that lenders receive less than the original value. This would result in a lowering of the ratings to 'SD', assuming GFH continues to honor its other obligations.

At this point, GFH has not defaulted.  The US$100mm rescheduled West LB stub is not  yet due.   It's due in August.  There has been no public statement that the payment cannot or will not be made.  Technically it has not re-rescheduled the already rescheduled US$100 million.   There are discussions but not yet finalized. 

Recall that under IFRS a reduction in interest rate in a rescheduling constitutes an impairment.  The US$100 million West LB "stub" is currently at a 5% margin for a six month transaction.  The renewed three-year facility is reportedly at a lower rate.

How to avoid what appears to be an inevitable "D" or  "SD" rating?

The US$100 million August payment is in a convenient ratings "limbo".

What if S&P were to issue an interim "limbo" rating now?  Perhaps unfortunately a bit lower than the current rating but still out of the dreaded "default" category?  A rating mutually agreed beforehand.

And then what if GFH were to terminate S&P's ratings engagement immediately?

Problem neatly solved.

And then again perhaps just a series of innocent events, though if one holds that view,  one  has to explain why S&P didn't wait the relatively short time until August to issue an updated rating based on an actual "event".

You be the judge.  AA has already made up his mind.