Rating Action Commentary
ֳ Downgrades Lebanon's Long-Term Foreign-Currency IDR to 'RD'
Wed 18 Mar, 2020 - 7:59 AM ET
ֳ - Hong Kong - 18 Mar 2020: ֳ has downgraded Lebanon's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'RD' from 'C'.
The issue rating on the USD1.2bn Eurobond on which the government has defaulted was downgraded to 'D' and withdrawn for the following reason: Bankruptcy of the rated entity, debt restructuring or issue/tranche default.
A number of Long-Term Foreign Currency issue ratings were affirmed at 'C' and withdrawn for the following reason: no longer considered by ֳ to be relevant to the agency's coverage.
Key Rating Drivers
The downgrade of the IDR follows the end of the grace period for payment of the USD1.2 billion Eurobond that matured on 9 March. This means the sovereign is in 'Restricted Default' and the 9 March bond has been downgraded to 'D' and simultaneously withdrawn as it has defaulted and is now past its maturity date.
We have affirmed and withdrawn the ratings (at 'C') for the remaining Eurobonds, which have not yet defaulted, because ֳ no longer considers these ratings to be relevant to the agency's coverage given that the sovereign has announced its intention to restructure all of these Eurobonds. ֳ expects all of these remaining Eurobonds to default in due course, either as the sovereign misses debt service payments or as an agreement is reached on restructuring the bonds.
The prime minister, Hassan Diab, said on 7 March 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 pursue negotiations with creditors in order 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 that there will be some restructuring of local-currency debt and ֳ believes this is highly probable (along with broader restructuring of financial sector balance sheets). However, as yet, a timeline for this is unclear.
Therefore, for now, we maintain the Local-Currency IDR at 'CC'. This would move to 'C' as and when a timeline and plan emerges for restructuring. Until then the government is likely 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 guided instead by our 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 LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
The main factor that could lead to positive rating action is:
-Once Lebanon reaches an agreement with bondholders on restructuring its long-term foreign currency debt and completes that restructuring process (for example, by issuing new bonds to replace the existing stock of bonds), ֳ will assign ratings based on a forward-looking analysis of the sovereign's willingness and capacity to honour its new foreign currency debt obligations.
The main factor that could lead to negative rating action is:
-The Long-Term Local-Currency IDR would be downgraded to 'C' if the government clearly announces plans to restructure its Lebanese pound-denominated debt. The rating would be downgraded to 'RD' in the event that the government defaults on the Lebanese pound debt before any restructuring announcement.
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 Creditors' Rights as willingness to service and repay debt is highly relevant to the rating and a key rating driver with a high weight.
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 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.
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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.