February 19, 2020
By Tom Arnold and Karin Strohecker
LONDON (Reuters) – Holders of Lebanon’s international debt risk losing as much as 80% of their investment as a debt restructuring looms that could be more painful than that inflicted on Greece’s bondholders during its crisis.
Analysts agree that Lebanon’s groaning public debt pile of around 150% of GDP is unsustainable and creditors will need to accept a haircut on their holdings in order for the country to avoid complete financial meltdown.
The most immediate focus is what the government will do about a $1.2 billion Eurobond maturing on March 9. Any payment would further worsen Lebanon’s already negative foreign exchange reserve position, as well as reduce the chances of longer-term debt holders getting a deal they deem fair and equitable.
The government has so far not announced its plans for the issue, although the country’s commitment to pay, underpinned by its desire to keep its so far unblemished payment record intact, has appeared to waver in recent days, say financial sources familiar with the matter.
Many of the country’s longer-dated bonds trade at around 30 cents on the dollar, a level considered by investors to be distressed and indicating a restructuring of the debt is likely at some point – a step the influential parliament speaker is said to see as an “ideal solution”.
“Its not too hard to envisage where the recovery rate of those bonds is very low – less than 20%,” said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which holds some Lebanese debt. “If they really need to get their house in order, bring the debt levels down, preserve FX reserves they need to make such enormous haircuts.”
RECOVERY VALUES
Recovery values could range between 20 to 30 cents on the dollar for exit yields of between 8% and 12%, assuming a 5-year maturity extension, estimated Alia Moubayed, managing director at Jefferies.
The exit yield is the market’s forecast of the value of sovereign bonds after a restructuring.
“We estimate that a 70% haircut would be necessary to bring Lebanon’s debt-to-GDP on to a sustainable debt path of 60-70% of GDP in 10 years,” said Moubayed, noting the government, central bank and broader banking sector were all suffering from a shortage of dollars.
Such a debt reduction could be more severe than some other recent sovereign restructurings. Ukraine in 2015 submitted most of its creditors to a 20% haircut when it was unable to meet its debts. Greece required private bond holders to accept a 50% writedown as part of the country’s recovery from its financial crisis that started in 2009.
Both of those countries got IMF support and a team of IMF experts is due in Lebanon from Thursday to discuss with authorities the economic challenges and provide broad technical advice, the fund has confirmed.
“A haircut of 70%, which some mention, is assuming the absolute worst case scenario – a disorderly default with no IMF involvement,” said Nafez Zouk, emerging markets strategist at Oxford Economics. “But once you start layering on top of that anything else that can happen, technical assistance with a credible backstop, or an IMF three-year program, then the recovery value starts to rise.”
BANKING SECTOR EXPOSURE
Goldman Sachs has warned that the symbiotic relationship between the government and the banking sector complicates any attempt to arrive at a realistic recovery value.
Having for years funneled capital to the central bank via investments from the diaspora, the banking sector’s exposure to government debt stands at almost twice its capital base.
One way around that problem could be to treat the debt of the government separate from that of the central bank, suggested Carlos Abadi, acting managing director at GSA, a French sovereign advisory firm.
“If they set aside the central bank and deal with that separately to the sovereign there’s a chance for a creditor-friendly restructuring that would be 60-65 cents,” he said. “But there has to be a fiscal plan and reform, including to the telecom and electricity sectors to relieve the budget of deadweight losses and bring in fresh dollars.”
If that option was taken, then recovery values could be broadly in line with Argentina, he noted.
Having defaulted on its debt in 2001, Argentina, again gripped by financial turmoil, is seeking to restructure about $100 billion in debt and has set itself a March 31 deadline to settle the rejig of IMF loans and then privately held bonds.
(Reporting by Tom Arnold and Karin Strohecker; Editing by Alex Richardson)
