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Lebanon - Raising funds through bond market to pay off debts

Friday, 26 February 2010 15:57

Lebanon's new national unity government is set to plunge into the bond market, looking to raise funds to pay off debts falling due this year while taking advantage of lower interest rates and tentative improvements in investor confidence.

This year, Lebanon has $2.15bn worth of Eurobonds maturing, with two tranches falling due in March and November. Added to this, it has some $8.3bn worth of treasury bills maturing at various times throughout 2010.

In mid-February, Finance Minister Raya Haffar El Hassan said in an interview with the Bloomberg news agency that the government intended to either sell up to $2bn worth of Eurobonds this year or conduct a debt swap, with two local banks and one international lender already chosen to manage the sale.

While the government's bond plans were well advanced, El Hassan did not specify when the issue would take place as she said the terms of the sale were still subject to negotiations.

The planned new issue had been flagged as far back as the beginning of December, with El Hassan saying the government would potentially look at dipping into the market in 2010 to service existing debts.

"We are benefitting from very low interest rates today," she said. "We have next year's challenges and at some point we may have to go to the market and borrow. There has been a swap before and the atmosphere is suitable for us to maybe refinance some of the debts due in 2010. We have to look and see how the market situation is but for sure it seems that we can ease the burden of the debt."

The minister's comments came as the new Lebanese government closed a highly successful $500m issue of Eurobonds to refinance public debt. The bond had been divided into two tranches, the first with a five-year maturity and the second with a term of 15 years.

Such was the interest in the issue, in particular from overseas companies, that it was quickly and heavily oversubscribed, a result that El Hassan described as "outstanding".

As of the second half of February, the $250m bond set to mature in 2015 was yielding 5.66%, marginally down on the 5.72% as of the middle of December, while the 2024 notes were returning 7.05%, a fraction up on the 7.02% yield from two months before.

Speaking at the time of the issue, Richard Fox, a London-based analyst for ratings agency Fitch, said it was likely the Lebanese government had conducted one of its usual debt exchanges.

"They invite holders of maturing bonds to go into longer maturity issues," he told the Reuters news agency on December 2. "It is purely voluntary. It is a debt management operation, which they have done in the past."

The government's hopes of further tapping into the bond market at a reduced cost were given a boost in December, when Moody's Investment Services revised its outlook on Lebanon's B2 government bond issuer ratings from stable to positive, a move that could encourage investors to buy into any future issues. The ratings agency also upgraded its outlook from stable to positive on Lebanon's B2 country ceiling for foreign currency bank deposits and B1 country ceiling for foreign currency bonds.

According to Tristan Cooper, Moody's head analyst for Middle East sovereigns, there were a number of factors that prompted the change to the outlook advisory for Lebanon.

"Lebanon's public finances have proven resistant to serious political and economic shocks in recent years," he said. "This is due to the strengthened resilience of the country's banking system, which is the government's primary creditor. Confidence in Lebanon's financial system has been bolstered by the central bank's large and growing cushion of foreign exchange reserves and its effective regulation of domestic banks."

Despite the vote of confidence, Moody's outlook also carried a warning, with Cooper saying that Lebanon's significant political and economic vulnerabilities always had to be taken into consideration.

"These include wide twin deficits, a very high public debt overhang, a tense domestic political environment, and a precarious geopolitical location," said Cooper.

However, the analyst said Moody's believed these risks and other concerns such as the slow progress in implementing much-needed economic reforms were adequately encapsulated in Lebanon's ratings.

While the government should not have any trouble in rolling over its existing debt or finding buyers for new bond issues, it still has to make progress in paying off part of the state debt. With public debt currently running at around $51bn, equivalent to 156% of GDP, and El Hassan having said in mid-December that the 2010 budget deficit would be close to the $2.96bn of last year, the government still has a delicate act to perform in order to balance the books.

Global Arab Network

This article is published in partnership with Oxford Business Group

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