As Lebanon’s crisis-hit bonds flash warnings of a sovereign debt distress ahead, any potential restructuring is likely complicated by the absence of widely-used legal clauses barring bondholders from holding up the negotiations in the courts.
Lebanon is one of the few countries – alongside the Bahamas, Azerbaijan, Macedonia and Poland – to not include so-called enhanced collective action clauses, or CACs, in the legal framework governing its recent bond sales.
The crisis-hit Mediterranean state has issued around $15 billion of international bonds since October 2014 without those clauses – more than any other country, according to an International Monetary Fund report from March.
Championed by the IMF, such provisions can make it easier for countries to proceed with orderly debt restructuring by enabling a majority of creditors to agree to modify payment terms of the contract or otherwise restructure the debt, overcoming any obstacles presented by minority creditors who favor holding out for legal recourse.
The absence of these so-called CACs effectively means the debtor has to get broad agreement to any restructuring, playing into the hands of often litigious speculative funds which seek to stall any workout by demanding court-sanctioned payouts.
Lebanon, gripped by its most severe economic crisis since the 1975-90 civil war following protests since Oct. 17, has repeatedly stated its commitment to paying its foreign currency bonds on time, including a $1.5 billion maturity due this Thursday, Nov. 28.
But with prices of its dollar bonds having slumped to less than half their face value since the demonstrations began, many financial observers believe Lebanon might need to restructure at least a portion of its estimated $86 billion in outstanding bonds in order to put its finances on a sustainable footing.
“Lebanon will need to demonstrate that the treatment of holders of each bond is comparable to the others,” said Oussama Himani, chief investment officer of Parkview Advisors, a wealth and asset management firm not invested in Lebanon.
“Comparability of treatment is not easy to demonstrate. For example, delaying all payments for all by 10 years will not be comparable treatment if the coupons paid are different.”
In the past, an absence of CACs posed a challenge for countries such as Argentina. It underwent a messy and drawn out restructuring after defaulting on its debt in 2001, in part as few of its bonds at the time included such clauses, opening the door to hedge funds and other activist bond holders to pursue legal action.
As Argentina prepares for fresh re-negotiations over its debt, the majority of its new bonds now contain CACs that mean a restructuring can go ahead if it is backed by either two-thirds or three-quarters of debt holders.
Camille Abousleiman, caretaker minister of labor and former head of international capital markets for the law firm Dechert, said Lebanon’s situation was not comparable to Argentina’s, from a legal perspective.
While Argentina’s eurobonds required 100% of holders’ consent for any amendment to the terms, Lebanon’s terms provide for 75% holders’ consent, voting on a series-by-series basis, he said.
Efforts to apply the collective action clause to Lebanon’s bonds in 2016 were not successful due to political complications arising from a government vacuum, said a financial source familiar with the matter.
“It is true that political considerations prevented the adoption of the more recent collective action clauses recommended by ICMA (International Capital Market Association) which permit the aggregation of series for voting and amendment purposes,” said Abousleiman, who worked on drafting the legal framework for Lebanon’s bonds.
Lebanon is locked in its latest political paralysis, with Saad al-Hariri on Tuesday saying he did not want to be prime minister of a new government after resigning from the post on Oct. 29.
The financial source, who noted Lebanon had then not issued a eurobond since 2017, said the absence of CACs meant that Lebanon would need to negotiate series by series if it were to go toward a restructuring.
The IMF has stressed that such clauses generally contribute to lower borrowing costs and can be particularly helpful for lower-rated countries during episodes of market stress.
Around two-thirds of Lebanon’s foreign debt is estimated to be held by local banks, but the remainder is held by international names.
Amundi, Invesco, JPMorgan, AllianceBernstein and Fidelity were among those listed as holders of the bonds up to the end of September, according to Refinitiv data. Fidelity said it still held a position, while the others did not immediately respond to a Reuters request as to whether they remained holders.
It is not clear who is currently holding the outstanding debt – after weeks of domestic upheaval and dramatic bond price falls.
Hedge funds that specialize in debt litigation and known for their legal battles with Argentina over its defaulted debt, such as Elliott Management and Aurelius Capital Management, did not immediately respond to a request for comment.