Sovereign bond restructurings are rarely smooth. Lebanon’s looks like it will be particularly rocky.
The rules underpinning the nation’s looming debt overhaul may complicate efforts to gather enough support to change the terms of its bonds. At the same time, they could protect the country from some of the issues that left Argentina with lengthy court battles.
So say Mark Weidemaier and Mitu Gulati, law professors at the University of North Carolina and Duke University, who published online reports about the nation’s $30 billion of international bonds after reviewing the detailed terms laid out in the Fiscal Agency Agreement. That document has only been available to bondholders at the office of Lebanon’s fiscal agent in Luxembourg.
“Lebanon’s FAA explicitly allows it to do what got Argentina into trouble,” they said in a post on the Creditslips academic blog. The terms make it “more difficult for holdouts to complain when the government pays restructuring participants (and everyone else) while leaving holdouts with nothing,” they said.
The so-called pari-passu clauses, used to guarantee equal treatment of creditors, may be a rare positive element for Lebanon in a revamp fraught with difficulties. More stringent terms in Argentina’s case left it battling holdouts in court for more than a decade.
Markets have already priced in the difficulties. Most dollar bonds are trading below 25 cents on the dollar, indicating losses of more than 75% on the face value of notes.
The government is considering a major reform program to overhaul banks and reduce total debt from 170% of economic output as foreign reserves dwindle. Bond holdings are split between foreign investors, local banks and the central bank.
One contentious point that Weidemaier and Gulati highlighted is the question of who can actually vote on changing terms. International bond rules usually restrict official holdings from counting toward a tally, and those limits may extend to some local banks, they said.
Central bank holdings won’t count in a vote to change terms on the bonds, according to a person familiar with the government’s view, who asked not to be named as they’re not authorized to speak publicly on the matter.
Thresholds needed to approve changes are also vague, according to the scholars.
“The Lebanese government may have to get creative to restructure,” Weidemaier and Gulati said in one of the posts. “We had hoped that the Fiscal Agency Agreement would clarify the respective legal positions of the Lebanese government and its investors. Nope.”