Lebanon’s creditors divided over financial restructuring draft

LONDON/BEIRUT, – Lebanon’s international and local creditors are at odds over a draft plan on tackling the country’s crippling financial crisis. 

Some international holders of Lebanon’s more than $30 billion Eurobonds are broadly supportive of the proposal, which estimates Lebanon will need external financing of $10 billion-$15 billion over the next five years, and say it can act as a blueprint to seek IMF financial support. 

But a letter from investment bank Houlihan Lokey, adviser to the Association of Banks in Lebanon (ABL), to investment bank Lazard, the Lebanese government’s adviser, expresses concerns about the plan, its impact on the banking system and its proposal to impose a financial burden on depositors. 

“Lebanese commercial banks are the single largest constituency of Eurobonds’ holders, which should be used to the advantage of the government and country as a whole to come up with a credible restructuring plan that ensures that the heavy debt burden is addressed while protecting the health of the banking sector and, more importantly, depositor monies,” said the letter, seen by Reuters. 

The plan, which is still being discussed by cabinet, was drawn up in the wake of Lebanon last month defaulting on its hefty foreign currency debt. A coronavirus lockdown has compounded economic problems which include a weakening currency and capital controls that have denied savers access to dollar savings. 

At a media briefing on the government’s economic plan on Thursday, finance ministry advisers described it as subject to revision as the government holds talks with various stakeholders. 

Figures such as the $83.2 billion in banking sector losses could change amid negotiations with bondholders that will determine the discount taken by foreign and local holders of debt. 

Adviser Alain Biffani said the plan did not mean the government would necessarily resort to an IMF programme, but targets on things like the deficit and exchange rate provided a strong starting point and were largely in line with the fund’s requirements. 

One of the more contentious parts of the proposal has been a reference to “a transitory exceptional contribution from large depositors.” 

Lebanon’s Parliament Speaker Nabih Berri this week said people’s bank deposits were “sacred” and must not be touched. 

“Before asking the public to directly assume responsibility for any portion of this problem, a complete and independent audit of historical government expenditures and finances must be prepared and made public,” the letter from Houlihan Lokey said, adding ABL agreed external funding from the IMF will be necessary. 

Steffen Reichold, portfolio manager at ‎Stone Harbor Investment Partners, described the plan as a “serious blueprint.” 

“With a plan like this you could get the IMF onboard,” he said. “Putting the debt on a sustainable path, restructuring all key institutions, wiping out all the capital of the banks, introducing a flexible exchange rate, reforming the electricity company – this is all the stuff that would be on the IMF’s likely list of requirements.” 

Lebanon’s bonds have tumbled to around 15-19 cents on the dollar in recent weeks, with global market turmoil further dimming recovery value prospects for creditors. 

“We had been taking a view that a 25-30 cents recovery would be good ballpark for the Eurobonds but taking this document at face value and assuming they’re serious about implementing the reform programme outlined, the recovery value will be better than that,” said Nick Eisinger, principal, fixed income emerging markets at Vanguard, which has a small underweight on Lebanon. 

Based on calculations from the plan, Reichold said it appeared the government was looking at a roughly 75% haircut on the principal on Eurobonds and domestic debt, which is broadly in the range of what he had expected. 

(Reuters)