Lebanon’s bond-swap dreams shattered as rating firms warn of default

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Lebanon’s plan to steer through its debt crisis by getting local investors to swap into longer-dated Eurobonds has come unstuck after rating companies warned they would consider it a “selective default,” a person familiar with the matter said.

The Finance Ministry sent a letter to the central bank Wednesday asking it to hold off on the deal, according to the person, who asked not be identified because the information isn’t public. Based on their communication with the ministry, rating companies could declare Lebanon to be in breach of its obligations “because it is considered a distressed exchange,” the person said.


Given the threat to the sovereign rating, the ministry has asked the central bank not to pursue the transaction until the government decides on a financing plan for its Eurobonds maturing in 2020, according to the person.

Lebanon’s next external debt repayment is on March 9, when a $1.2 billion bond comes due. The price collapsed to 77 cents late last year after massive anti-government protests forced Prime Minister Saad Hariri to resign. The notes have since partially recovered, though the yield remains above 100 percent. They fell more than a cent to 86.5 cents as of 12:43 p.m. in London.

Local investors, mainly banks, probably hold around half of the March bonds, analysts at JPMorgan Chase & Co. said this week. They added that the swap plan signals rising financial stress in a country battling its worst economic crisis in decades.

A central bank spokesman declined to comment. Governor Riad Salameh described the proposals in an interview last week as “voluntary and dependent on the consent of Lebanese banks.” He did not say what would happen to the holdings of foreign investors, who have all but priced in a default but differ on when it would happen and whether they’d be exempt.

Moody’s Investors Service and S&P Global Ratings rate Lebanon CCC or its equivalent, eight steps into junk territory. Fitch Ratings assesses it two levels lower. None of the three companies immediately responded to requests for comment.

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