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Fitch Rates Seychelles' Discount Bond 'B-'

February 15, 2010 | Fitch Ratings

Fitch Ratings-London-12 February 2010: Fitch Ratings has today assigned Seychelles' new USD169m discount bond a Long-term foreign currency rating of 'B-'. The bond was issued as part of a debt exchange with Seychelles' creditors following its 2008 default on certain notes.
The rating on the bond, which is subject to English law, is equal to the Long-term foreign currency Issuer Default rating (IDR) of Seychelles assigned on 1 February 2010. The Outlook on the foreign currency IDR is Positive.

Seychelles defaulted on the scheduled repayment of its EUR55m promissory note in July 2008 and the coupon due on its USD230m eurobond in October 2008. Negotiations with creditors over USD321m in foreign currency liabilities (including USD9m worth of commercial loans from banks) has now resulted in the issue of a new discount bond that will see investors take a haircut of 50% on the face value of their claims; a six-year grace period on principal repayments (the bond will pay out in 20 equal instalments over 2016-2026); and a step-up in interest payments to 8% from 3% over the life of the bond. The interest payments on the new discount bond also benefit from a partial guarantee of up to USD10m from the African Development Bank.

On 12 April 2010 Seychelles will also make a "goodwill" payment at the rate of USD10.44 per USD100 of the face value of the new bond (i.e. a total of about USD18m) towards its past-due interest bill. Moreover, the bond also espouses a principal re-instatement clause that will grant bondholders an additional 25% of the face value of the new bond (USD42.3m) if Seychelles fails to pass the International Monetary Fund's (IMF) first review of its three-year extended fund facility (EFF) by the end of 2010.

Following the debt exchange and earlier write-offs from the Paris Club and other bilateral creditors, the maturity profile of external public debt is significantly improved and the debt burden materially lowered to a projected 50% of GDP in 2010 from 144% in 2008. The sovereign's immediate financing needs have been significantly reduced to less than USD30m per annum (3% of GDP) over 2010-11, which can be met out of the disbursements from multilateral agencies and the primary fiscal surpluses Seychelles is required to run under the IMF programme.

The sovereign rating also takes into account Seychelles' history of macroeconomic and fiscal mismanagement, narrow economic base, still high debt levels, large current account deficit and low levels of foreign exchange reserves that render it susceptible to external shocks. These factors continue to constrain the rating. On a positive note, the authorities are implementing an ambitious and challenging reform programme including the floating of the exchange rate, elimination of subsidies, and extensive public sector downsizing. Fiscal performance has been impressive, outperforming IMF targets despite a sharp drop in GDP, and inflation has been significantly reduced. The extension of an IMF programme to a three-year EFF is testament to the authorities' long-term commitment to reform despite ongoing challenges. As a result, Fitch expects Seychelles' credit profile to gradually improve, consistent with the Positive Outlook on the rating.

Company: Seychelles

Full company nameRepublic of Seychelles
Country of riskSeychelles

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