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Billions in bonds rolled

Beirut carries out largest debt exchange ever outside the United States

by Executive Staff

The biggest voluntary debt exchange outside the US was successfully completed by the Lebanese government in March when it “rolled over” $2.3 billion worth of foreign currency bonds. The government exchanged four dollar-denominated bonds maturing in 2009 for new dollar bonds maturing in March 2012 and March 2017.

The minimum yield guidance was set at 7.5 percent for the new March 2012 bond, and 9 percent for the new March 2017 bond.

The government also offered holders of its 2009 euro-denominated floating-rate notes an exchange for a tap of the existing 5.875 percent euro-denominated bonds due in April 2012, with the minimum yield set at 7.75 percent. The government selected three banks — Byblos Bank, Credit Libanais and Credit Suisse — to act as deal managers for the exchange offer.

The Ministry of Finance said the purpose of the debt exchange was “to proactively conduct liability management, increase the republic’s financial flexibility and extend its debt maturity profile.”

The international financial sector reacted positively to this voluntary exchange, as it is expected to improve the government’s ability to deal with the large public debt and reduce roll-over risk in the near term.

Moody’s Investor Service upgraded Lebanon’s local and foreign currency bond ratings to B2 from B3, respectively. Moody’s said the reason for this upgrade was the substantial improvement in external liquidity, the proven resistance of the public finances to shocks, and the willingness and ability of Lebanon’s resilient banking system to finance fiscal deficits.

“This exchange improves the structure of the government’s very large debt stock by extending its average maturity and reducing roll-over risk in the near term,” Tristan Cooper, a vice president-senior analyst in Moody’s Sovereign Risk Group, told the Middle East and North Africa Business Report.

Concurrently, Moody’s upgraded Lebanon’s country ceiling for foreign currency bank deposits to B2 from B3, while its country ceiling for foreign currency bonds has been raised to B1 from B2. Standard and Poor’s also raised the country’s credit rating from CCC+ to B-.

Although the voluntary debt exchange was seen positively by credit ratings agencies, the amount transferred is trivial in comparison with Lebanon’s $47 billion public debt. Lebanon’s credit rating is still six levels below investment grade.

Eurobond deal

Source: Central Bank.

Average participation rate

Source: Central Bank.

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