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Lebanon’s New PM Tackles Old Debt With Risk, Reward Aplenty

Netty Ismail

(Bloomberg) -- Lebanon’s sky-high bond yields and credit default swap spreads may start to dip if a new government unveiled this week can ease concerns about a sovereign default.

Investors are watching a $1.2 billion Eurobond, payment for which is due on March 9. Its price has risen this week due to the formation of the government, ending a period of caretaker rule since protesters forced the resignation of the prime minister in October. But it’s still trading at just 83 cents on the dollar, equating to an annualized yield of around 185% if they were to be paid back in full. That suggests there are still plenty of investors with doubts.

Incoming Finance Minister Ghazi Wazni said in an interview Wednesday that the March securities would be at the top of the cabinet’s agenda when it meets next week. New Prime Minister Hassan Diab is set to visit countries in the Gulf Cooperation Council, raising the possibility that Lebanon gets funding from allies such as Saudi Arabia and Qatar.

“The market is on edge around the real potential for a missed redemption,” said Paul Greer, a London-based money manager at Fidelity International, which owns a small amount of Lebanese debt. “We think the chances that Lebanon pays the bond are higher than what the market is assuming, but clearly the risks are very high.”

Lebanon’s political struggles and the absence of external funding have sent its default risk soaring. The government’s five-year CDS has increased above 2,900 basis points, among the world’s highest, since ratings companies warned they may downgrade Lebanon if it got local holders of the March bond to swap into longer-dated notes.

That means investors have to pay 61 cents upfront plus quarterly fees to get five-year insurance on a dollar of the country’s debt, implying a default probability of about 95% for the time period, according to Bloomberg data.

For now, it’s unclear whether Lebanon will jeopardize its sovereign rating by pushing ahead with the swap plan. The government also has $1.3 billion of Eurobonds maturing in April and June, although those have fewer foreign holders than the March notes, roughly half of which are owned by international investors, according to JPMorgan Chase & Co.

Investors have to decide whether potentially fat returns make up for the risk of investing in a country struggling with its worst economic and political crisis in decades. Standard Chartered Plc said a debt restructuring will become much more likely if Lebanon fails to secure sufficient external funding in the next six months.

“The government formation and a statement around the bond repayments being a priority are no guarantee that the dollar bonds due in March and June will be paid out,” said Greer, whose developing-nation debt fund outperformed 94% of peers in the past year.

(Updates prices throughout, adds default probability estimate in 6th paragraph.)

To contact the reporter on this story: Netty Ismail in Dubai at nismail3@bloomberg.net

To contact the editors responsible for this story: Alex Nicholson at anicholson6@bloomberg.net, Paul Wallace, Srinivasan Sivabalan

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