On Thursday, the finance ministry said that government bonds maturing in 2013 through the first quarter of 2016 would be replaced with five new issues holding the same coupon rate and at five-10 year maturities.
The move was required under the terms of a bailout deal with the European Union and the International Monetary Fund.
But S&P said on Friday that the "exchange materially changes the terms of the affected debt and constitutes what we consider a distressed exchange".
"We view the extension of maturities without what we find to be adequate offsetting compensation as the exchange of new debt on less favourable terms to the existing debt."
It lowered the long- and short-term sovereign credit ratings to SD (selective default) from CCC/C.
After the exchange, which is expected on July 1, S&P said liquidity strains on the government should be alleviated, and that the rating is expected to rise to CCC+.
However, it noted that the "government will still need to deal with the forthcoming rollover of a stock of 950 million euro Treasury bills," equivalent to five percent of GDP.
Fitch also said on Friday it had lowered its long-term local currency rating to RD (restricted default) from CCC.
"This transaction constitutes a DDE (distressed debt exchange)... as the maturity extension at existing coupon rates represents a material reduction in terms for bondholders," the agency said.
In exchange for a 10-billion-euro loan from the EU and the IMF, Cyprus agreed in March on 13 billion euros in measures to cut its budget deficit and to restructure its bloated banking system.
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