"A contractual default, a credit event and a credit rating default are three different albeit related concepts," said our Of Counsel Rodrigo Olivares-Caminal, expert in debt restructuring and sovereign debt, in an article published by Reuters, in which he comments on Ukraine’s debt crisis. In a distress situation, it is important to distinguish among them.
A contractual or legal default occurs when the debtor breaches the event of default clause included in its external obligations and does not cure the situation before the elapse of the grace period, if any.
A credit event is what ISDA will consider as a trigger for a CDS repayment. The following are considered typical credit events: (1) failure to pay; (2) repudiation/moratorium; and/or, (3) restructuring (i.e. reduction of interest or principal payable, postponement or deferral of payment of principal or interest, subordination of the relevant obligation, etc.).
Credit rating agencies can assign a "default" (all rating agencies) or "selective default" (not applied by Moody's). If this happens, it does not necessarily mean that the sovereign is either under default on contractual terms or has triggered a credit event. The main relevance of a credit ratings' rating of ‘default’ or ‘selective default’ is the behaviour that it will trigger in the market.
Ukraine has proposed to defer payments on its international bonds for 24 months to avoid default. The country's creditors vote this week on this government proposal to decide whether to back it or vote it down. In the article published by Reuters, Rodrigo explains that the two-year moratorium on external debt payments would allow Ukraine to avoid a contractual or legal default, as any amendment on the bonds' terms would have the creditors' backing.