After months of warnings, Standard &
Poor’s downgraded Lebanon’s sovereign
credit rating saying that the government
had failed to take measures to
stem the ballooning public debt, expected y
to reach 140% of GDP by year-end. The
credit rating was pushed down one notch,
from BB- to B+, making it more expensive
to borrow on international markets.
S&P said it was also unlikely that the
government would reach its deficit target of
15.5% of GDP. Also listed was the government’s
failure to capitalize on the $2.7
billion offer made by the two cellular companies
to buy GSM licenses. As well parliament’s
failure to approve a draft value added
tax (VAT) law before the elections
would likely lead to a delay in the implementation
of VAT, originally scheduled for
next year. S&P also expressed doubts that
the new government, expected to take
office in November, would be able to make
much headway in tackling the deteriorating
financial situation this year. Both
Lebanon’s current and previous credit ratings
are considered below the minimum
investment grade level of BBB-.
A second jolt came from Moody’s, which
last month put Lebanon’s BI domestic currency
debt rating on credit watch. It also cited
the growing public debt as reason for alarm.
Green light
The Central Bank has approved the
merger of Banque Libanaise pour le
Commerce (BLC) and the United Bank of
Lebanon (UBL) four months after a major
scandal threatened to derail the deal. The
approval came after Safi Harb, former
UBL chairman, and Jean Felix
Aboujaoude, BLC’s former general manager,
agreed to pay back nearly $40 million
of questionable loans to themselves and
close family members.
The new bank, named BLC, elected
Chafic Moharram as its chairman and general
manager and now ranks among the
country’s ten largest banks with assets of
$1.5 billion. Harb and Aboujaoude were
forced to relinquish their shares before the
deal could go through, leaving
Mohammad Safadi, a wealthy Lebanese
businessman, the majority shareholder in
the new bank with a 56% stake. Moharram
has said that the bank plans to boost efficiency
and cut costs, including layoffs of
10% to 12% of its 750 employees.
The merger closes a tumultuous chapter
in Lebanon’s banking history. In mid-
1999, an attempted merger between BLC
and Byblos Bank fell through over what
Byblos said were bad debts held by BLC.
Since 1997, BLC’s Beirut listed shares
have more than halved to around $10. Its latest
available results show a loss of $5.4 million
in 1998, after registering profits of
$13.7 million in 1997. “I think things are
stabilizing,” says Jean Riachi, chairman
and general manager of Financial Funds
Advisors. ” Things look good.”
The up-market pays
Societe des Grands Hotels du Liban
(SOHL), owner of Vendome and
Phoenicia hotels, came out with 1999 earnings
of $1.43 million, an 84% increase
from 1998 at $776,833. It is expecting bigger
profit gains this year, as high as $10 million.
The catalyst is Phoenicia, which
opened last March. With a focus on quality
and having the largest conference room in
Lebanon, Inter-Continental targets corporate
clients. Along with Vendome still maintaining
a high occupancy rate, averaging
77% through August, according to Noha
Saliba, Phoenicia’s PR manager, bookings
in the new hotel have exceeded expectations,
averaging 50% between April and August.
She also believes that the coming months
will bring on a surge. “Our conference
room is fully booked and in October and
November our occupancy will reach 80%,”
says Saliba. SGHL’s shares have settled
around $5.
No looking back
Credit Libanais is still showing an
impressive profit performance. Since
the central bank cut it loose in 1997, its earnings
growth has been on a tear. After earnings
jumped 52.5% last year, its pre-tax profits
climbed 29.5% to $12.4 million in the first half
of 2<XX> compared to the same period last year.
Net interest income increased 18.8% and fee based
income rose 15.4%. According to Elie
Abimrad, the bank’s financial controller,
although one major contributor to the rise in
profits came from maintaining healthy yields
in liquid assets, Credit Libanais benefited
from its focus on expanding on retail banking.
Retail lending has grown, pulling in higher
yields, and more products and services have
been launched so far this year.
Credit Libanais may be catching up with
the big banks. Although Banque du Liban
et d’Outre-Mer (BLOM), Byblos Bank
and Banque Audi have much higher profits,
Credit Libanais’s profit growth surpassed
them. BLOM’s growth increased
14.6%, while Byblos and Audi’s dropped
-0.1 % and -11 %. Though Credit
Libanais’s figures are based on pre-tax
data, net profit growth is still expected to
come in higher than the top banks.
Bond bombshell
A dollar-denominated eurobond issue
aimed largely at US institutional
investors has been put on hold indefinitely
until a new government is named. “It was
ill-conceived to think you could sell a 20-
year bond to Americans without the new
government in place and its policies clear,”
says an analyst about die timing of
the initial announcement for the issue just
before the elections.
Part of the aim of such an issue would be
to lengthen the maturity of the debt. It
would come at a higher premium compared
to previous issues, though still
below what it would cost Lebanon’s
peers, according to the analyst: “It still
would have ended up being mostly in the
hands of Lebanese banks, if not on the
primary market then eventually on the
secondary market.”
Morgan Stanley Dean Witter and Credit
Suisse First Boston, who were supposed to
lead manage the issue, subsequently handled
$450 million in three-year eurobonds.
Of these, 80% were taken up by Lebanese
banks, 15% by European investors and 5%
by Gulf investors.
Getting dragged down …
Standard & Poor’ s recent downgrade of
Lebanon’s sovereign rating has also
pulled down the credit ratings of three of the
country’s largest banks. Banque Audi,
Banque de la Mediterranee and Banque du
Liban et d Outre-Mer (BLOM) saw their ratings
go from BB- down to B+, the same as
Lebanon. S&P cited the banks’ heavy
holdings of government T-bills as the primary
reason for the downgrade. “Banks
are a major source of government financing,
holding 75% of outstanding treasury bills in
1999,” said S&P. But, according to one
analyst, “Unless the banks are going to
issue new debt, it won’t have any effect.”
… again and again
A s a consequence of the further deterioration
of the operating environment
in Lebanon, Moody’s Investors Service
changed its outlook on Banque Audi’s
financial strength rating from positive to
stable. This put the financial institution on
par with Byblos Bank and Banque du Liban
et d’Outre Mer. “This does not directly
reflect a drop in Banque Audi’s rating,”
says Nabil Chaya, head of capital markets at
Audi. “As the sovereign ceiling is lowered,
Banque Audi’s rating is adjusted accordingly
due to the increased vulnerability of the
bank’s financial strength in the face of a
weakened operating environment.”
Trading places
The Arab Stock Exchange Union has
been transferred to Beirut from Cairo
after a 19-year exile due to the civil war.
‘This will send a signal to the rest of the
world of the reliability of the Lebanese capital
markets,” says Fadi Khalaf, chairman of the
Beirut Stock Exchange. He says that despite
the incentives offered, including tax exemptions
and the cooperation of the BSE, the
decision to transfer the headquarters was
based on the federation’s recognition of the
great potential of Lebanon’s capital markets.
“The trust the federation has shown in making
this move isn’t to be taken lightly,” he says.
The Arab Clearing House, responsible for
clearing stock trades in the region, is next in
line to settle in Lebanon once its members provide
the $5 million in capital. “Within six
months, we expect Arab stock exchanges to be
linked together through one website,” continues
Khalaf. “And eventually the site will
allow online trading.”
Confusion reigns
There has been some confusion over the
price of Casino du Liban’s shares
recently. Though frequently quoted at
$200, the actual price fluctuated around
$150, which Fidus rated as a good buy. AlMustaqbal
newspaper put the price as low
as $100, based on one investor selling
1,400 shares, just over 0.1 % of the casino’s
720,000 shares.
“If anything has caused a drop in share
price, the more likely culprit is the ongoing
attempt by board members to oust chairman
Elie Ghorayeb,” says a casino official.
Ghorayeb has been at odds with the
board’s 11 members, mostly over the $23
million in outstanding taxes, which
finance minister Georges Conn is claiming
on slot machines from 1997 up to 1999.
Ghorayeb claims that these have always
been tax exempt and has appealed to the
Shura council.
Ghorayeb’s restructuring program is also
causing conflict: The staff was reduced by
100 and contracts with service providers
were renegotiated. “Renegotiating alone
cut down expenses by $5.4 million,” says
Joseph Araiji, responsible for press relations
for the casino. The gambling house has
settled its $23 million debt in record time.
In the first half of 2000, pre-tax profits
were $10.3 million compared to $7.3 million
for the same period last year.
Barely holding on
The market value of Lebanon
Holdings, the only closed-end fund
listed on the Beirut Stock Exchange,
dropped 9.2% during the first six months of
2000, from $39.9 million to $36.3 million.
“If you look at the holdings, you see that it’s
mainly due to a drop in all shares on the
BSE,” says one analyst. The fund’s shares
last traded at $5.33 three months ago.
Earlier, Lebanon Holdings bought back
300,000 shares in an attempt to boost the
market value.
