What does Business Rescue mean for credit risk, ratings and cross-default?
Business Rescue precludes creditors from applying for liquidation of the business. This is the removal of an existing right of lenders: “a temporary moratorium on the rights of claimants against the company or in respect of property in its possession”
From what I gather it’s not clear that this formally counts as default – might depend on specific loan or bond terms and how credit rating agencies respond to this.
How one “feels” about this is less relevant than the legal interpretation for cross-default provisions. It certainly feels like default to me.
For SAA, it’s also a step which means the government is no longer prepared to keep putting in money. That’s certainly a message about how likely any implicit (rather than explicit) governmental guarantees are for other entities.
Short aside on government debt and balance sheets
It’s not really so much that this is bad news, but rather this is the long-overdue recognition of how bad the news is around SOEs and their total contribution to the true Debt/GDP and their zero or negative contribution to the less-publicised Asset/GDP ratio. As I’ve mentioned before, another useful ratio would be (Debt-Assets)/GDP, which if measured carefully can be a more useful measure of the true financial position of a country and a better guide for decisions on whether to privatise an existing SOE.
A full balance sheet approach and one that considers return on capital (as well as also-important social-development, second-order, longer-term and positive externality items) should form a greater part of policy decisions.