Standard & Poor’s Global Ratings (S&P), the international rating agency, revised the rating of several Lebanese bonds to “D” (Default) from “SD” (Selective Default) on missed principal and coupon payments that were due in March and April, whilst also revising to “CC” the ratings of 14 bond issues that were erroneously changed to “SD” on March 11. The agency also affirmed the long and short-term foreign currency (FC) ratings at “SD”, and the long and short-term local currency ratings at “CC” and “C” respectively. The outlook is still negative, portraying the risk to local currency commercial debt repayments in light of the continued political, financial, and monetary pressures. S&P kept Lebanon’s transfer and convertibility assessment stable at “CC”.

The rating agency highlighted that the government decided to suspend paying its foreign currency debt obligations, including a $1.2 billion Eurobond payment that matured on March 9, 2020, whilst pointing out that Lebanon’s total outstanding Eurobonds portfolio stands at around $31 billion. According to the report, the new government under Prime Minister Hassan Diab, along with support from external advisors, has started engaging creditors in debt-restructuring negotiations, releasing in parallel a recovery plan that covers reforms on the economic, fiscal, banking sector and exchange rate aspects with the financial consulting firm Lazard also preparing a draft report that provides more detailed recommendations without setting a timeline for implementation. In this as vein, S&P expects the negotiations to be delayed beyond the year 2020 in the absence of a consensus over the plan coupled with the ramifications of the COVID-19 pandemic. From another standpoint, the report pointed to the faltering local currency peg to the dollar amid the ongoing foreign currency shortages and the widening gap between the official and parallel exchange rates. The agency further mentioned the recent BDL circular that announced the creation of a foreign exchange unit at the Central Bank in order to regulate the exchange rate used by money exchange dealers, and another circular that grants small depositors the right to withdraw $3,000 from their bank accounts in Lebanese Pounds at the applicable market exchange rate, indicating a move towards a dual or multiple exchange rate regime.

The rating agency stated that it could improve the foreign currency issuer ratings for Lebanon from “SD” at present if a debt exchange or a restructuring agreement between Lebanon and its creditors sees the light. From another angle, the report noted that the government has not yet decided on restructuring its local currency debt obligations standing at around 110% of GDP, yet stated that the government would have to restructure the said debt if it where to put it on a sustainable path. S&P also highlighted that the report submitted by Lazard Frères stated that the impact of the public debt restructuring on banks’ balance sheet could be addressed through bail-ins from banks’ shareholders, a portion of depositors, and mergers & liquidations. Finally, the agency commented that it could improve the sovereign rating if the probability of a distressed exchange of Lebanon’s local currency debt decreases. S&P stated as well that it could lower the local currency issuer rating to “SD” if the government signals its intention to restructure its local currency debt.