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. Last Updated: 07/27/2016

S&P Ups Foreign Currency Rating

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Following the completion of the restructuring of MinFin tranche 3 bonds, international rating agency Standard & Poor's upgraded Russia's foreign currency issuer rating to B minus from SD, or selective default.

"This completes a series of restructuring of Russia's local and foreign currency obligations, following the government's default on ruble-denominated debt in August 1998," says the text of the press release circulated Friday by Standard & Poor's.

Earlier this week the Finance Ministry reported that 91 percent of third tranche holders, who are owed $1.2 billion, filed applications for conversion into MinFin 7 bonds maturing in 2007 and ruble-denominated paper due in 2003.

The seventh tranche, worth $865 million maturing in 2007, is rated triple C plus by S&P, while the ruble bonds due in 2003 are rated B minus.

Settling the dispute with holders of MinFin tranche three, on which the government defaulted in May 1999 under pressure from Soviet-era debt holders, opened the way for Standard & Poor's rating upgrade.

It also lifted the D (default) rating on the MinFin tranche three bonds.

MinFins, also known as Vneshekonombank or Taiga bonds, were issued in the early 1990s to restructure foreign liabilities of the defunct Vneshekonombank, which sank together with the former Soviet Union. The bank has since been revived.

Eurobonds' rating of B minus remained unchanged, so S&P's Friday move did not have a direct effect on the most popular debt instruments.

"This is mostly a technical decision," Eric Fine, strategist with Morgan Stanley, said in a telephone interview from London. "What we are looking for is Moody's upgrade of Russia by one notch."

But in Moscow, the S&P decision sparked a stock market rally, which sent the RTS index through the roof to 163.03, up 7.72 percent.

"The upgrade was one of the movers on the market today," said Andrei Kukk, senior trader with NIKoil brokerage.

"In fact, the upgrade just gave the awesomely oversold equity market a good excuse to rally — while debt, far more stable of late, shrugged it off as yesterday's news," Eric Kraus, chief strategist with NIKoil, said in a statement circulated Friday night.

The B- rating assigned to Russia implies a 21 percent probability that the nation will go into default within five years, according to a ratings performance study of European issuers carried out by Standard & Poor's in April.

Non-U.S. issuers made up 30 percent of the agency's clientele last year, of which emerging markets issuers accounted for 9 percent.

Though the study is based on the history of corporate defaults in Europe, it is nevertheless indicative of a broad probability of an issuer going off the rails.

"Besides the issuer's rating, one should also take into account the maturity of a particular instrument," said Dmitry Kozodoi, criteria and quality officer for structured finance with Standard & Poor's in New York.

S&P's global default statistics reveal that the mean life of defaulting B- rated companies stands at 3.4 years.

Moody's decision to stick a B2 rating on Russia's debts, expected within two to three months, will put it in the same group with Venezuela, a large oil-exporting country with a comparable economy, whose debts are traded 350 basis points above Russia's.

Moody's rates Brazil at B1, an equivalent of S&P's B plus, so the upcoming upgrade could make Russia comparable with a large player on international capital markets.