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This week's main developments relate to two heavily-indebted
emerging market countries moving in opposing directions:
Barbados appears to have reached agreement with its
international creditors on debt restructuring and relief, including
a 26.3% haircut.
Lebanon is facing political instability which threatens to
undermine its currency peg and is pushing its debt to yield levels
that appear to discount write-downs.
Barbados restructuring
On 18 October, Barbados announced that it had reached a deal
with its international market creditors, some 18 months after
defaulting. Under the announced arrangements, Barbados will issue
at least USD500 million of new 6.5% debt with a 2029 final
maturity, making the new issue index-eligible. The new bonds will
amortize in equal instalments semi-annually from April 2025.
Outstanding debt, including deals due in 2019, 2021, 2022 and 2035
will be exchanged for the new instrument with a 26.3% haircut.
Unpaid interest will be subject to a similar haircut and covered
by a USD7.5 million cash payment on closing, along with USD32.5
million of Past Due Interest bonds largely payable in October 2020,
with final maturity due in February 2021.
The restructuring also makes provision for natural disasters,
allowing Barbados to capitalize interest and defer principal
payments for two years in the event of such events. Overall, the
arrangements are similar to those already accepted by domestic
creditors.
According to Barbados's statement, the deal is an in-principle
arrangement subject to the completion of mutually acceptable
documentation. It notes that the bondholder committee that agreed
to the new arrangements represents "more than half" the
government's eligible debt.
Lebanon
Lebanon's economic fundamentals have been weak for an extended
period. It has long-standing deep economic imbalances, including a
last-reported debt-to-GDP ratio of 152%, a budget deficit of 11%,
and a current-account deficit of 23%. It needs continued access to
external funding to support these severe imbalances and repay
maturing debt, with near-term refinancing needs reportedly of USD2
billion.
Efforts to restrict its fiscal imbalances have triggered
widespread recent protests, with widespread calls for the
government to resign. In the event this occurs, which our Country
Risk team views as likely (if not an immediate prospect) the
country faces an extended interval before elections could be held
and a new administration formed. There is also risk that Hizbullah
would use its strong parliamentary position to seek greater
involvement in government, potentially steering the country's
political orientation towards Iran and increasing the risk of US
sanctions.
In prior analysis, IHS Markit has flagged that Lebanon's foreign
exchange reserve position is considerably weaker on a net basis
than the headline data. This reduces its resilience to the current
political uncertainty, posing challenges to the continued viability
of the country's currency peg, and its access to international bond
markets. Bond market reactions to recent developments indicate
growing concern over Lebanon's debt sustainability. The return on
Lebanon's 2021 debt rose three percentage points on 21 October to a
24% yield, implying the likelihood of debt-restructuring and
potential haircuts for bondholders.
Emerging markets
Saudi Arabia gained USD14 billion of demand for a USD2.5 billion
10-year sukuk issue, priced at 127 basis points over mid-swaps
versus initial guidance of 145 b.p.
Indonesia launched a 12-year Euro-denominated benchmark deal on
23 October, with initial price guidance of mid-swaps plus 160 basis
points.
On 21 October, Norilsk Nickel launched a USD500 million
five-year deal. The offering had initial price guidance of 3.625%.
The deal was increased to USD750 million and priced at 3.375%: peak
demand reached USD2 billion from over 110 investors according to
Tass, citing a lead manager.
Majid Al Futtaim, a shopping mall firm based in UAE, is
preparing its second issue of Green sukuk bonds. The deal will be
dollar denominated with a 10-year term. On 23 October, demand
reached over USD2.1 billion.
High-yield debt
There has been adverse focus on a buy-out debt package funding
Blackstone's USD7.5 billion buy-out of the UK's Merlin
Entertainments, operator of Madame Tussauds and Legoland. On 17
October, Merlin raised two eight-year bonds, comprising EUR350
million at 4.5% and USD410 million at 6.625%. Analysts have
highlighted the modest returns for the deal along with the weakness
of its financial covenants, which allow the firm to issue up to
EUR1.2 billion of additional debt (2.4 times its equity), despite
having 5.9 times leverage after the buyout.
Conversely, on 21 October, International Financing Review
claimed that investors had gained "the upper hand" in negotiations
over covenants in Bain Capital's USD4 billion buyout of Kantar, a
"data, insight and consultancy" company previously owned by
advertising group WPP.
Other debt
Landesbank Baden-Wuerttenberg is planning a debut AT1 issue,
seeking a perpetual deal callable in 2025 or 2027, and is meeting
investors this week. It has established a program to arrange up to
EUR1.5 billion of such instruments by end-2020.
Implications and outlook
Barbados's deal with its creditors - if approved, which seems
likely - is a further positive indicator for the re-establishment
of its debt sustainability. At its default in 2018, public debt had
increased to 157% percent of GDP, with a minimal reserve cushion of
just 5-6 weeks of import coverage. In a September 2019 statement,
the IMF - which agreed a support package with Barbados in late 2018
- noted that it now "continues to make good progress in
implementing its ambitious and comprehensive economic reform
program". It flagged that the government achieved a primary surplus
of 2.5% of GDP in Q1 2019, which "bodes well" for achievement of
its 6% primary surplus target for 2019 while reserves also stood
above IMF program targets.
According to Professor Avinash Persaud, Special Envoy on
Investment and Financial Services to the Prime Minister, quoted in
Barbados Today newspaper, the new deal implies debt service savings
of around USD1 billion over a four to five-year time span. He
flagged that "the reduction in the amount of external debt
outstanding is around 25 per cent or USD422 million", with the
country also benefitting from a reduced interest coupon of 6.5%
(versus 8% average on prior outstanding debt), longer maturities
and a smoother amortization schedule.
Lebanon's position looks far less encouraging. During 2019,
there has been ongoing discussion that its domestic banks would
subscribe new government debt at below-market rates to enable
Lebanon to repay maturing debt. For some time, the narrow investor
base for its debt - largely comprising local banks with a few
speculative international investors - has been a source of concern.
This is growing as market participants place increased focus on its
political risks, the potentially-modest nature of its foreign
exchange reserves and heavy reliance on local banks to fund its
debt requirements.
The fall of the current government, and the resulting likelihood
of limited scope to progress planned fiscal austerity, along with a
possible swing towards Iran, would leave Lebanon facing severe
risks, including the possible collapse of its currency peg. Default
is not yet inevitable: one particular "bail-out" source could be a
rescue package from other regional governments, with Lebanon having
sought help from the UAE recently. Overall, however, its financial
position looks bleak: we would not be surprised to see local banks
undertaking "voluntary" debt exchanges within the coming year to
relieve near-term debt service obligations, as an alternative to
facing further bank levies and the threat of asset
confiscation.
Lastly, the focus on covenant quality in the high-yield market
is becoming increasingly important. With renewed central bank
easing, both banks and asset managers face additional constriction
of available returns. If this translates into increased willingness
to invest in highly-risky assets with weak covenant protection,
this would represent a clear indicator of the potential for
financial sector misallocation of assets, raising future systemic
risks for banks and asset managers.
Posted 25 October 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit