Selective Default

Selective default (SD) is a sovereign or corporate credit rating assigned by S&P Global Ratings when a borrower defaults on a particular class of obligations but remains current on others. Fitch Ratings uses an analogous category called "restricted default" (RD). Moody's does not use the term but captures similar situations through its Ca and C ratings combined with default tags.

The rating is typically triggered by:

• Missing a scheduled coupon or principal payment past the contractual grace period.
• A distressed debt exchange in which creditors are offered new instruments worth less than the original promise (lower coupon, longer maturity, principal haircut). S&P treats coercive exchanges as defaults even when bondholders technically "consent."
• Use of collective action clauses to bind holdouts into restructuring terms.

SD differs from a general default (D) because the issuer is still servicing the rest of its debt stack. This distinction matters for cross-default clauses, credit default swap triggers (the ISDA Determinations Committee rules separately on whether a "Credit Event" has occurred), and for IMF program eligibility.

Notable sovereign episodes rated SD by S&P include Greece in February 2012 during the PSI bond exchange, Argentina on multiple occasions (2014 after the NML Capital litigation blocked payments, and 2020 during the COVID-era restructuring), Ecuador in 2020, Belize in 2021, and Sri Lanka in 2022 after suspending external debt service. Russia was downgraded to SD by S&P in April 2022 after attempting to pay dollar Eurobonds in rubles.

A selective default is usually short-lived as a rating state: once the restructuring closes and new instruments are issued, the agency reassigns a fresh rating (often in the CCC or B range) reflecting the post-exchange capital structure. For investors, the label drives index exclusion (e.g., from JPMorgan EMBI), forced selling by mandate-constrained funds, and higher future borrowing costs.