Lebanon Debt Swaps Set to Pay $215 Million After Default

(Bloomberg) -- Investors holding debt protection on Lebanon are in line to share compensation of $215 million after the government defaulted for the first time in its history.

Firms holding credit swaps on the heavily-indebted nation will receive 86% of the amount covered by the instruments, according to the final results of an auction to settle the contracts on Thursday. Credit default swaps pay out when a borrower fails to pay its debt and are used by investors to make negative bets on borrowers or as hedges for bond investments.

Lebanon is struggling to cope with dwindling foreign-currency reserves and double-digit inflation amid its worst financial crisis in decades. A new government backed by Hezbollah, the Iranian-linked group, is trying to overhaul about $90 billion of debt and engage in talks with bondholders after the nation failed to honor a $1.2 billion Eurobond due last month.

Some of Lebanon’s largest creditors including Ashmore Group Plc and Fidelity Investments are forming a bondholder group ahead of debt negotiations.

READ: Ashmore, Fidelity Forming Lebanon Bond Group Amid IMF Talks

The Middle Eastern country has reached out to the International Monetary Fund to discuss its draft economic rescue plan in the hope of getting aid, Prime Minister Hassan Diab said last week.

Payouts on credit derivatives are likely to become more frequent in the coming months as borrowers impacted by coronavirus lockdowns struggle to keep up with their debt.

Ecuador may trigger swaps with its decision to defer some debt payments until August as the nation battles against the decline in oil prices and the impact of the Covid-19 pandemic.

U.S. oil producer Whiting Petroleum Corp. and telecom company Frontier Communications Corp. are set to pay CDS holders after filing for bankruptcy this month.

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