Issuer: Republic of Lebanon
Amount: $712 million
Type of issue: sovereign Eurobond
Date: September 22
Bookrunners: Credit Suisse First Boston, Morgan Stanley Dean Witter
Lebanon has confounded the sceptics by successfully raising more than $700 million in Eurobonds denominated in dollars and euros and, for the first time, persuading American investors to buy significant amounts of paper.
But it was a hard sell for Lebanese finance minister George Corm and the lead managers, Morgan Stanley Dean Witter and Credit Suisse First Boston. They mounted a high-profile road show round European and American financial centres in an attempt to widen the investor base for the bonds, which have traditionally been bought by local banks and investors. This has been a partial success, with almost a quarter of the dollar bonds sold to American investors. They were persuaded to accept a lower return than for a comparably-rated country by the argument that these bonds are a "defensive asset" - Lebanese issues have remained stable even in periods of emerging-market and regional volatility.
There was a price to pay. London bankers say that the euro portion of the bond had to be reduced, and that the spread on the dollar tranche was increased to more than the 400 basis points that the government had hoped for. More of the bonds had to be sold to domestic investors than was originally intended.
A total of $400 million was raised in a 10-year dollar bond at 440bp over US treasuries, producing a 10.326% yield. Some 62% was sold to Lebanese domestic and overseas investors and 32% to foreign investors, including 23% into the US. The euro element totalled €300 million ($314 million) at 400bp above the euro interbank offered rate for seven years with a 8.944% yield. Only 16% of these bonds were sold internationally.
"It has gone very well. We had a good order book and we were able to cut people back. This has been a major step forward, particularly in the US, where investors have picked up virtually no Lebanese paper before," said Ian Hardie, executive director in emerging capital markets at Morgan Stanley Dean Witter.
In Beirut, bankers said the bonds had been well received. According to Salam Saadad of the Beirut-based Middle East Capital Group: "It has gone much better than expected." Another Beirut banker said quite a few local banks "only bought the bonds under pressure. But since then they have seen the bonds trade very well and are happy to have bought".
The issue also won the slightly grudging endorsement of the lead managers' rivals in London. "They have done a very good job in averting what was potentially a disaster and done so without taking much paper on their own books," says one. "When they started, it looked as if it were not a decent story at any price. But they persuaded Lebanese institutions, who were insisting that they were full of sovereign paper, to buy more, and the involvement of American investors is a significant development."
The deal's successful launch vindicates the strategy of finance minister Corm, who mounted a highly personal campaign to persuade international investors of the country's growing political stability and the determination of the government to reform the economy and end the circle of debt and budget deficits. "It is highly unusual for a Lebanese finance minister to go on these types of roadshows," says a Beirut banker.
Bankers say that the bond, the first part of a $2 billion borrowing programme approved by parliament, may be seen as a significant step in the government's strategy of internationalizing its investor base by bringing bond prices in line with those of comparably-rated countries. This cannot be done overnight. Lebanon's credit rating is similar to that of Argentina which would expect to pay 600bp above the interbank rate. But that would have represented too big a gap with Lebanon's earlier Eurobonds, which had been targeted primarily at local investors and were only at 250bp above governments. "The next issue will be another 40bp tighter and the gap will gradually be narrowed", says one banker.
The sensitivity of the pricing issue was shown by the impact on the existing Eurobonds, whose bid price prices fell by 3% to 4% when the new issue was first announced. Bankers deny this is the start of a long-term decline, pointing out that the offer price has remained high.
One of the Lebanese market's strengths has been the stability of its Eurobond prices when most bonds from emerging markets have faced a period of turmoil. This is largely due to the habits of local investors who see their bonds as a long-term investment to be held to maturity.
Lebanon has been one of the most prolific and successful emerging-market issuers of bonds. It has raised $3 billion in the last five years and was the sole issuer of Arab sovereign debt between March 1997 and May 1999. According to the Beirut-based Middle East Capital Group, this "demonstrated a unique ability to tap international capital markets regularly, even when they are in turmoil".
The government is anxious to raise more money to fund its budget deficit and finance existing debt more cheaply. At present, debt servicing takes up 47% of budget spending and the government wants to reduce this figure by converting the expensive outstanding short-term Lebanese pound bonds into cheaper Eurobonds.
It has little choice but to target international investors. Lebanese institutions, individuals and bankers, who took most of the earlier issues, are reluctant to buy more paper. There is little liquidity and the economy is in recession. Local investors want to receive higher returns than those offered for the earlier issues.
"Their appetite is reduced because most local investors already have a lot of Eurobonds. But there is also a major change in attitude: they want a return which is nearer that for comparably-rated countries and they don't want to be seen as the only takers of Lebanese bonds," says a Beirut investment banker.
Bankers believe that the underlying stability of Lebanese bonds will enable the government to return to the market when it wishes to do so. "Lebanon has a good reputation for satisfying creditors, and foreign debt remains well below the 40% of GDP benchmark", says Habib Zoghbi, president of the Harvard Business School Club of Lebanon.