Rating Action Commentary
ֳ Downgrades Lebanon's Long-Term Foreign Currency IDR to 'C'
Mon 09 Mar, 2020 - 11:26 AM ET
ֳ - Hong Kong - 09 Mar 2020: ֳ has downgraded Lebanon's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'C' from 'CC'.
Key Rating Drivers
The downgrade follows the announcement by the government that it does not intend to pay the USD1.2 billion Eurobond maturing on 9 March. The grace period for paying the principal is seven days. Failure to make the payment during the grace period will put the sovereign into 'Restricted Default' (RD) and the specific bond into 'Default'(D).
According to ֳ's ratings definition, 'C' ratings are assigned to issuers with distressed obligations that have experienced ceased or interrupted payments, including situations where a grace period has been entered and/or the issuer has made a formal announcement of its intention to restructure debt.
The prime minister, Hassan Diab, said that, with the country's foreign reserves dwindling, Lebanon would no longer prioritise foreign debt payments over funding basic imports and that the government will negotiate with creditors to restructure the government's debt.
The government statement is not explicit on whether debt restructuring will involve local-currency debt (just over 100% of GDP), as well as the stock of Eurobonds (USD31 billion, approaching 60% of GDP). Nonetheless, the government's reference to making overall debt sustainable suggests some restructuring of local-currency debt and ֳ believes this is highly probable (along with a broader restructuring of financial sector balance sheets). But, as yet, a timeline for this is unclear.
Therefore, for now, we maintain the 'CC' rating for the local-currency IDR. We would downgrade it to 'C' as and when a timeline and plan emerges for restructuring. Until then the government plans to remain current with its local-currency debt obligations.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
In accordance with its rating criteria, for ratings of 'CCC' and below, ֳ's sovereign rating committee has not utilised the SRM and QO to explain the ratings, which are instead guided by the ratings definitions.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LTFC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final LTFC IDR, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
ֳ will review Lebanon's ratings after the expiry of the grace period (of seven days) of the upcoming Eurobond maturity, or if a payment is made before that date.
The main factors that could lead to negative rating action is:
-If, as indicated by the prime minister's announcement, the payment is not made on time, ֳ will downgrade the LTFC IDR to 'RD' and the relevant securities to 'D'.
-The rating for the Long-Term Local-Currency IDR would be downgraded to 'C' if the government announces plans to restructure its Lebanese pound-denominated debt.
The main factor that could lead to positive rating action is:
-The sovereign reversing its announced decision not to pay the Eurobond maturing on 9 March before the end of the payment grace period.
Key Assumptions
ֳ expects global indicators to move broadly in line with ֳ's Global Economic Outlook forecasts.
ESG Considerations
Lebanon has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in ֳ's SRM and is therefore highly relevant to the rating and a key rating driver with a high weight.
Lebanon has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators (for which Lebanon scores well below peers) have the highest weight in ֳ's SRM and is therefore highly relevant to the rating and a key rating driver with a high weight.
Lebanon has an ESG Relevance Score of 4 for Creditors' Rights as willingness to service and repay debt is relevant to the rating and a rating driver.
Lebanon has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as scores for the Voice and Accountability pillar of the World Bank Governance Indicators are relevant to the rating and a rating driver.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ֳ's ESG Relevance Scores, visit .
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.