March 13, 2020 / 5:30 PM / in 17 days

The wrong time to go bust: investors wary of distressed Lebanon debt

BEIRUT (Reuters) - With distressed debt investors and emerging markets funds suddenly faced with one of the sharpest asset price falls in a generation, Lebanon picked the wrong time to go bankrupt.

Funds are still circling as the clock ticks down on Lebanon’s first sovereign default, but some may not buy until after the government unveils plans to revamp the debt and reform its economy, and the dust settles on a global asset plunge.

More than $450 million of the debt has been traded since the government said at the weekend it could not meet its foreign currency debt, MarketAxess data showed. Lebanon is on a path to default when the grace period for its $1.2 billion Eurobond expires on Monday.

Hedge funds and distressed debt funds were among the buyers this week, two financial sources familiar with the matter said.

Their purchases add a risk of uncertainty to Lebanon’s debt restructuring process, given the record of some in that industry pursuing legal action in other countries in dire straits, such as Argentina and Venezuela.

But it could also potentially help smooth the process along if those buying are motivated to secure a consensual restructuring deal, said one of the financial sources.

Some funds and existing holders of the debt say they’re waiting for information on the likely scale of the haircut on the debt and concrete plans on areas like rescuing the banking sector and reforming the energy and telecom sectors.

“There’s been a default and bonds are a lot cheaper but there’s still a lot of uncertainty as we still need to know what they will do with the banking sector, depositor haircuts and currency,” said Richard House, CIO emerging market debt, Allianz Global Investors, which is considering buying.

Other investors are steering clear for now, as long as there is so much global uncertainty following this week’s coronavirus-inspired oil price war and asset price falls.

“We are looking at it but not involved,” said Alberto Gallo, head of macro strategies at Algebris Investments, a London-based hedge fund that exited positions in Lebanon and Argentina before both got into distress.

“At 25 cents in normal circumstances we would buy it as we like the country, but in the current market there are a lot of other credits that have come down in price. What will make us more positive is if there’s a clear plan and if the oil price war calms down a bit.”

Finance minister Ghazi Wazni said on Thursday that Lebanon’s plan to tackle its crisis will meet IMF recommendations and will be ready to be presented to creditors in weeks.

More of the debt could change hands in the coming weeks once holders decide whether to crystallize losses from the default or ride it out to see if recovery values improve.

The dollar bonds are currently trading generally below 25 cents to the dollar, with the March 2020 issue having shed more than half its value in the past week.

A total of $239.6 million of the debt was traded on Monday, according to MarketAxess data, the highest in several weeks, but still short of levels reached earlier this year when local banks, which hold the largest chunk of the debt, sold some of their holdings to foreign funds.

Distressed debt veterans Greylock Capital and Switzerland-base Mangart Advisors have begun organizing talks between some bond holders and other interested investors.

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