This four-year deal, handled entirely by Morgan Stanley, marks Lebanon’s latest effort to manage its worrisome public debt: it also provoked a hissy fit among rival debt market investment bankers.
It refinanced $650 million of local US dollar Contractor bonds and raised an additional $100 million off the Republic’s MTN programme. Contractor bonds were launched by the government in the 1990s to settle large arrears to construction companies incurred through the country’s heavy post-war reconstruction spending.
The issue pays a semi-annual coupon of 10.5% – a good price for the sovereign, as some market participants had expected a level between 13% and 14%. The deal went exclusively to Lebanese accounts, mainly to banks, although there was some retail participation.
Much to the annoyance of rival bankers, Morgan Stanley executed the deal for no fee, citing relationship reasons. Rival bankers speculate that the relationship reason might be a forthcoming telecoms mandate. Morgan Stanley denies that it has any such mandate in the bag, although it confirms that it is looking at several securitization deals.
Rival bankers also argued that the deal should not be included in league tables because it was an exchange and because it was done for no fee. “It’s a new deal raising new cash off the Republic’s MTN programme like any other,” replies a source at Morgan Stanley. Dealogic, which compiles bond league tables, says that fees do not play a part in deciding whether deals are included in these or not.
Lebanon, with a large debt burden maturing over the next few years, would love to diversify its funding and extend its maturity profile. But that’s not easy. The central bank itself has had to step in a couple of times this year to buy ministry of finance Eurobonds issued to replace maturing treasury bills. The only Eurobond this year to attract notable foreign participation was a $1 billion straight exchange deal issue in March handled by Morgan Stanley and BNP Paribas, which also went to a number of Saudi Arabian and Malaysian accounts. “Lebanon is a hard sell,” concedes one investment banker. “It has been for a while and they still need to make a lot of progress.”
Although these deals have not been of much success in diversifying Lebanon’s investor base, bookrunners have managed to extend maturity profiles and to make substantial interest savings for the sovereign.
The reluctance of foreign investors to participate in Lebanese sovereign deals boils down to two factors neatly encapsulated by one London-based emerging markets fixed-income investor: “Lebanon has huge public finance problems and is not a good performer.”
According to Fitch, Lebanon’s net external debt has been rising quickly and is now an estimated $7.8 billion. Annual debt service amounts to 17.5% of GDP and is set to consume 82% of budgeted revenues for this year, Fitch calculates. Foreign exchange reserves fell 20% in 2001 to $4.9 billion as the current account deficit rose to an estimated 34% of GDP, by far the highest of any rated sovereign.
Lebanon’s stable exchange rate has traditionally been a source of stability for its credit, but the enormous pressure building up in the current account and falling reserves raise doubts about its sustainability. Although Lebanese officials, including prime minister Rafik Hariri, have expressed a strong commitment to the exchange rate target, the rating agencies are not convinced that the central bank will be able to avoid an eventual devaluation.
Banque du Liban has consistently chosen to use its reserves to protect the exchange rate instead of raising interest rates because it wants to avoid increasing the equally worrying public-sector debt burden. Government debt reached 168% of GDP in 2001.
The government has worked hard to tackle its enormous problems and no-one is talking of a default yet.
This year the government introduced a 10% value added tax that it predicts will raise L£800 billion ($548 million) this year. It has also introduced other tax measures and expenditure cutbacks that should contribute an additional L£939 billion. Thanks to these measures the finance ministry projects a small primary surplus of L£625 billion, which will go towards debt repayment.
The government also hopes to raise up to $7 billion over the next few years from the privatization of its airline, electricity, and telecoms industries. Many view that target as ambitious given the inefficiency of national carrier Middle East Airlines; the state of the country’s electricity infrastructure, which has been damaged by Israeli bombardment; and the politicized nature of the proposed telecoms privatization.
The privatizations of the country’s two mobile phone operators, Libancell and Cellis, which had been scheduled for the end of August, were delayed because of disagreements between the country’s prime minister and president over whether the companies should remain under Lebanese control.
