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08 March 2020

Lebanon suspends repayment of $1.2 billion Eurobond

Prime Minister Hassan Diab said that his government would seek to restructure its debt through negotiations with bondholders

Lebanon hired Lazard and Cleary Gottlieb Steen & Hamilton as advisers/Bloomberg

by Bloomberg

Lebanon will suspend a $1.2 billion Eurobond payment due on 9 March 2020 and seek talks with creditors to restructure its entire $90 billion debt pile, the first step in a broader plan to stabilise an economy in crisis.

Prime Minister Hassan Diab, said, “Our foreign currency reserves have reached a critical and dangerous level, forcing the Lebanese Republic to suspend payment on its March Eurobond.”

 “How can a country’s economy grow on borrowing and how can we be truly free while we’re drowning in debt?” said Diab.

The premier, who only formed his government two months ago amid months of nationwide protests, said the country’s ratio of debt to gross domestic product had reached 170 per cent and it was neither right nor possible to keep borrowing to finance corruption that had become entrenched in the public sector.

The announcement opens the way for a long-anticipated bond overhaul in a country with one of the world’s highest debt loads, dwindling foreign-currency reserves and double-digit inflation.

Negotiations will be complicated by political divides that have held up previous efforts to turn around the economy and high foreign ownership of bonds maturing this year. Lebanese banks and the central bank hold most of the rest of the government’s Eurobonds.

Additionally, negotiations follow weeks of political wrangling on how to place the country’s finances back on a sustainable path, after foreign remittances—the main source of hard-currency revenue—slowed to a trickle as confidence fell and the banks imposed restrictions on the transfer and withdrawal of dollars.

In October 2019, protests erupted in several parts of the country including Beirut over the severe economic slowdown and a sharp depreciation of the local currency on the parallel market.

Local lenders, who hold almost $14 billion of the notes, had lobbied against a disorderly default that would force hefty losses on creditors, warning that it could do irreparable harm to the reputation of the banking sector and its capital.

Similarly, Banque du Liban which itself owns about $5.5 billion of the debt, has proposed swapping the March bond for longer-dated instruments.

Bond investors are more sceptical about the prospects for an easy fix. The notes have mostly traded below 30 cents on the dollar, suggesting the market expects the country to wipe roughly 70 per cent off their value.

Lebanon hired Lazard and Cleary Gottlieb Steen & Hamilton as advisers.

Even with a decision to restructure debt, an agreement with bondholders may be complicated by political bickering and rampant corruption. The remaining debts are denominated in Lebanese pounds and are largely held domestically.

RELATED STORIES: Lebanon Banque du Liban Eurobonds





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