These are uncertain times in global markets. So one might have expected a certain reticence from investors when a recently downgraded sovereign, which is unable to elect a president and has ISIS pushing at its borders, tried to launch its biggest-ever bond. In fact, it flew out the door.
On February 23, the Lebanese Republic launched $1.4 billion of 15-year bonds and $800 million of 10-year paper. It did so at 6.65% on the longer-dated tranche, 6.2% on the shorter. That’s no mean feat.
“If you look at Ghana as a comparable – it has the same credit rating and similar fiscal and structural weaknesses – well, Ghana doesn’t have to deal with ISIS or Hizbollah, yet it is trading at 9% to 10%,” says Nicholas Samara, in emerging markets debt capital markets at Citi, one of the joint bookrunners alongside Blom Bank and Société Générale de Banque au Liban.
In fact, the presence of ISIS and Hizbollah, and the consequent fraught relations with neighbouring Israel, isn’t the half of it.
Lebanon has had to absorb more than 1 million refugees from war-torn Syria, an extraordinary drain on a country whose population is just 4.4 million; it has gone nine months and counting since it last had a president, leaving a vacuum within which the only way any measure can be passed is if all 24 ministers have agreed to it, a situation that has so far meant that there’s no official budget; its tourism industry has been hammered by concerns about the security situation, contributing to a slowdown from 7% GDP growth before the global financial crisis to probably 3% this year; and it has government debt that Moody’s expects to hit 140% of GDP this year.
Yet in spite of all of this, the bond was considerably oversubscribed, attracting $5 billion of bids and $3 billion on the 15-year tranche alone.
| We have always achieved better pricing than our rating would suggest. But I was surprised at the amount of oversubscription|
Marwan Mikhael, Blominvest
Lebanon managed this extraordinary trick because of the enduring strength of its banks, fuelled by a successful and loyal Lebanese diaspora.
“The key factor here is that the Lebanese banking system is very robust, with total assets approximately 3.5 times GDP, and these local banks have a restriction to invest part of their deposits into Lebanese Eurobonds,” says Samara. “The local banks will always provide a bid and make a market in these bonds. That strong support from the locals then attracts international investors to come in.”
There was a roughly 80/20 split between local and international investment, and the deal was only roadshowed domestically.
Investors were also attracted by the fact that they have seen Lebanon remain remarkably resilient in the face of even more exacting circumstances than these: civil war, for one.
“Lebanese spreads tend to stay stable, while spreads in other emerging market economies widen,” says Samara. “Lebanon has proven itself to have a strong track record in debt servicing. It’s true there are a lot of structural weaknesses in Lebanon, but the support of local banks and their liquidity has kept the yield curve stable at all times.”
Marwan Mikhael, head of research at Blominvest in Beirut, says the fact that a $1 billion Eurobond matured in January also helped, along with the central bank permitting exchanges into another bond due to mature in April.
“We have always achieved better pricing than our rating would suggest,” he says (Lebanon is rated B-/B2, following a downgrade from Moody’s in December). “But I was surprised at the amount of oversubscription.” Those close to the deal say it represents the largest-ever net new issue from Lebanon. Although Lebanon has gone this long once before, it did so only with a $250 million deal; the size of the 15-year tranche this time reflects local demand for yield pushing investors out along the curve.
It’s a useful piece of good news at an otherwise difficult time, although Mikhael describes an improving situation.
“There is a feeling that the security situation has improved quite drastically,” he says, despite ISIS having stated an intention to absorb part of Lebanon into its state.
And the domestic political problem? “Yes, it’s difficult, but people are getting used to the situation and it is not deteriorating. The big issues are being taken care of by the council of ministers. Other things are still on hold, but in general things are moving.”
The government deficit is coming down, he says, whereas investors had in fact been expecting the budget situation to deteriorate. And aid from the UN for Syrian refugees has helped.