Foreign Bondholders Join Lebanese Debt Restructuring Chorus

(Bloomberg) -- Some foreign holders of Lebanon’s Eurobonds are expressing support for a government debt restructuring as the clamor grows among local politicians to skip a payment due in weeks.

At a private meeting days ago with government representatives, a number of foreign funds that own Lebanese sovereign bonds, including a $1.2 billion note due March 9, argued that the crisis-ridden country would be better off restructuring rather than paying its debt, said a person familiar with the matter, declining to identify the investors.

In a suggestion that the fallout can be contained, they said Lebanon’s bonds were already discounted on their balance sheets, according to the person, who asked not to be named because the information isn’t public.

Most of Lebanon’s bonds maturing beyond this year trade at between 35 and 40 cents on the dollar. The March notes fell around 2 cents to 87 on Thursday, still above their low of 76 on Jan. 29.

Central bank Governor Riad Salameh has told officials including the new prime minister, Hassan Diab, that he is willing to pay the debt if instructed by the government, people familiar with the talks said. He’s already helped repay nearly $5 billion of bonds in the past year.

While Diab is in favor of meeting Lebanon’s debt obligations this year, according to a local media report, he hasn’t yet made a final decision.

Foreign Bondholders Join Lebanese Debt Restructuring Chorus

The decision will come down to a choice of who should bear the cost of easing one of the world’s biggest debt burdens, estimated at over 150% of gross domestic product last year, as hardships mount after months of protests. Lebanon is enduring its worst financial crisis in decades, with the central bank rationing dollars and nationwide unrest over what many fear could be an imminent collapse.

Despite a spotless record of servicing international debt, consensus is fraying in Lebanon as almost $3.5 billion in Eurobond principal and interest payments come due by June.

Payment Options

Bankers say local lenders, which hold most of the country’s Eurobonds, favor a repayment to avoid blowing a hole in their balance sheets. The most recent payment of $1.5 billion, made by the central bank in November, was criticized by some local politicians who said Lebanon should instead use what’s left of its reserves on buying much-needed imports.

A group of lawmakers aligned with a majority in parliament is lobbying the government to seek technical assistance from international institutions before making a final decision. They’re trying to convince the premier and others that Lebanon risks a crisis and violence similar to Venezuela, which defaulted on its debts in 2017.

Legislators present at a committee meeting last week almost unanimously agreed -- albeit in private conversation -- that the government shouldn’t pay, a lawmaker said.

The debate is playing out against a dire backdrop, with Lebanon’s reserves stretched thin and the economy succumbing to a recession as currency shortages worsen.

An ex-economy minister, Nasser Saidi, has called for a restructuring of public debt, while also saying Lebanon would need a bailout of as much as $25 billion that could require support of the International Monetary Fund. Former Minister of State for Information Technology Adel Afiouni has said paying off the March bond would be “wrong.”

The decision rests with the government, formed last month with the backing of Lebanon’s most powerful military force, the pro-Iranian Hezbollah, and its allies.

“The issue should be finalized next week,” a Hezbollah Member of Parliament, Ali Fayyad, said in an interview in Beirut. “We need to look at all the options and study their impact and there should be a conclusive plan that doesn’t only focus on paying or not paying but also a larger plan.”

Foreign Bondholders Join Lebanese Debt Restructuring Chorus

The central bank’s net foreign-currency holdings are sufficient to pay for the near-term import bill and debt redemptions, while local lenders have enough in reserve to cover deposit outflows, according to Morgan Stanley.

“What is more important to watch is the political sentiment on the trade-off of using reserves to cover debt servicing versus imports,” Jaiparan Khurana, a London-based strategist at Morgan Stanley, said in a report. “Market focus should remain on the cabinet decision.”

A repayment of Eurobonds may entail a controversial proposal by the central bank to get local holders of the March notes to swap into longer-dated instruments and pay foreign creditors. Salameh has told bankers that a foreign fund was interested in buying the bonds coming due next month if Lebanon proceeds with the swap.

Foreign Bondholders Join Lebanese Debt Restructuring Chorus

Around a third of Lebanon’s roughly $30 billion of Eurobonds are held by outside investors, with the rest owned by the central bank and local lenders, according to Oxford Economics. Foreigners owned about 40% of the March bond in early December.

Lebanese banks also have billions of dollars of foreign-currency deposits tied up at the central bank.

Lebanese lenders and the government have already agreed on a plan to relieve some of the debt this year. Bankers who met with the new finance minister earlier this week agreed to lower interest rates they get on local-currency sovereign bonds, a person who attended the meeting said.

The central bank also said it would waive interest payments on the government’s local debt this year. Authorities want to use the saved funds, amounting to about 2.9 trillion pounds ($1.9 billion), to reduce the budget deficit. A plan to impose a one-time tax on banks’ profit to generate $400 million fell through.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.