Time to negotiate: Lebanon officially defaults on its Eurobonds

Lebanon's Prime Minister Hassan Diab speaks during a televised address to the the nation at the governmental palace in Beirut, Lebanon March 7, 2020. (File photo: Reuters)

Just over a week ago, Lebanon announced it would default on $1.2 billion of Eurobonds. Now, after a seven-day grace period, the country is officially in default on the March 2020 series, triggering a cross-default on all outstanding bonds.

It is now up to the Lebanese government to restructure payment of the 27 outstanding Eurobond series through negotiations with bondholders, a process that will likely take months. What will these negotiations look like? And who are the major players in the negotiations?

Who calls the shots?

The government and its creditors must now vote on how to restructure the total $32.2 billion on a series-by-series basis. To reach agreement on a specific series, 75 percent of the bondholders must agree on the new terms. In effect, this means that if a fund owns 25 percent or more of the bonds in any of the 27 series it has a veto, putting it in a powerful negotiating position.

By the end of 2019, around a third of Lebanon’s Eurobonds were foreign-held – in other words, owned by entities outside of Lebanon, mainly investment funds. Those which individually held over 25 percent of bonds in one or more series included Shroder, Ashmore, Black Rock, Amundi, Fidelity, J P Morgan, Amundi, and Pinebridge, according to data from Thomson Reuters Eikon.

Read more: Lebanon’s dollar reserves critically low: Economists

The current split between domestic and foreign-held debt is unknown and will only be indicated when reporting funds release data about recent transactions at the end of March. Most economists expect the ratio to have changed dramatically in favor of foreign-held owners, effectively giving foreign funds a stronger negotiating position.

leb debt

leb debt

By the end of 2019, around a third of Lebanon’s Eurobonds were foreign-held – in other words, owned by entities outside of Lebanon, mainly investment funds. Those which individually held over 25 percent of bonds in one or more series included Shroder, Ashmore, Black Rock, Amundi, Fidelity, J P Morgan, Amundi, and Pinebridge, according to data from Thomson Reuters Eikon.
The current split between domestic and foreign-held debt is unknown and will only be indicated when reporting funds release data about recent transactions at the end of March. Most economists expect the ratio to have changed dramatically in favor of foreign-held owners, effectively giving foreign funds a stronger negotiating position.

“The real vultures are not there [in the current data]. The real vultures have not entered. The ones getting in now are getting in for a fight,” former bank chairman Dan Azzi told Al Arabiya English.

According to Azzi, several little-known vulture funds are currently buying up Lebanese foreign currency debt. By the end of March, they will hold around half of Lebanon’s Eurobonds, he predicts.

Read more: Lebanon’s wealth destroyed as country defaults on Eurobond

Lebanese banks sold Eurobonds at significant discounts earlier this year to raise their liquidity. For foreign investors, this meant high risks for high returns; for the Lebanese, it allowed foreign investments funds – often pejoratively described as “vulture funds” – to swoop in and buy up debt on the cheap. This has considerably weakened the government’s position in future negotiations.

leb debt graph

leb debt graph

Why did Lebanon default?

The Lebanese Cabinet’s decision to default was unanimous, but the decision was hardly unopposed. Many argued that Lebanon should have upheld foreign-held debt payments, since they represent a fraction of the total – around $12 billion at face value by the end of 2019, compared to $90 billion in total. Avoiding default would have also salvaged some of Lebanon’s financial credibility, in the eyes of anti-defaulters.

However, Lebanon’s central bank reserves are at an unprecedented low, making the $12 billion owed to foreigners seem more daunting. Although the Banque du Liban, Lebanon’s central bank does not publish its net reserves, they are assumed to stand between $6-$22 billion.

The government decided to prioritize using their dwindling foreign reserves to buy essential imports such as fuel, medication, and wheat, instead of paying off foreign-held debt.

Moreover, Lebanon’s worst financial and economic crisis in decades had already destroyed market confidence in the debt-ridden country. These factors, in addition to a popular outcry against continued Eurobond payments in a time of economic hardship, informed the government’s decision to seek a restructuring.

Lebanon’s debt-to-GDP ratio currently stands at 160 percent. The country’s sluggish economy was a key cause of the nationwide protests which have wracked the country since October last year. In the past months, the local currency has devalued by around 30 percent against the US dollar, leading thousands to lose their jobs.

SHOW MORE
Last Update: Wednesday, 20 May 2020 KSA 09:57 - GMT 06:57
Top