Lebanon crisis has Templeton warning on debt restructuring

Lebanon just got one of its starkest warnings yet that it will need to restructure its $30bn of Eurobonds.
Franklin Templeton, which oversees more than $690bn of assets worldwide, said the government will have to renegotiate the debt load to stave off an economic collapse.
“The system is broken and the credibility is gone,” Mohieddine Kronfol, the firm’s chief investment officer for Middle Eastern and North African fixed income, said in a Bloomberg Television interview. “We need to see some decisive action and some engagement with some multilateral agency or some donor countries to move forward.”
Lebanon has an unblemished record of bond repayment through war and political strife and government officials have repeatedly ruled out a default. But investor confidence in its ability to meet liabilities has crumbled following weeks of street protests that have led to Prime Minister Saad Hariri’s resignation.
The nation’s Eurobonds are the world’s worst performers in emerging markets this quarter despite a package of emergency measures rolled out in October. The securities have lost investors 16%, according to Bloomberg Barclays indexes.
The yield on the government’s $2.1bn of notes maturing in April 2021 has almost quadrupled this year to 42%, with the price collapsing to 66 cents on the dollar.
Its debt risk, as measured by five-year credit-default swaps, has risen the most in the world since the end of September, to 1,615 basis points.
Markets are “basically pricing in a default in the next few months,” Kronfol said. “They are probably fairly accurate.”
The nation has $30bn of dollar bonds outstanding, according to data compiled by Bloomberg. The figure is $46bn when interest is included.
Moody’s Investors Service last week downgraded Lebanon deeper into junk, citing “the increased likelihood” of what may constitute a default under its definition.
Attempts to secure financial assistance from Gulf allies have so far come up empty. Lebanon’s finances are becoming ever more precarious as it suffers shortages of foreign currency and even fuel, while struggling to attract bank deposits, a key source of funding for the government.
“Time is passing by and if they cannot move forward, the concept of a voluntary debt restructuring starts diminishing and it becomes a very hard landing or a collapse,” said Kronfol, who also oversees Templeton’s global sukuk business. “Lebanon is not a trade that we consider in the short term, at least until we see some institutional developments.”