Deals that succeed in spite of dreadful market conditions are always most satisfying. Credit Suisse was one of two banks to help the Republic of Lebanon through a new issue and bond exchange at the trickiest of times. Edward Russell-Walling talks to the team.

Political deadlock at home, a recent ratings downgrade and the worst international credit environment in living memory – these are not the ingredients for a successful visit to the debt capital markets. However, in spite of these handicaps, the Republic of Lebanon was still able to pull off a nail-biting new issue and a multiple bond exchange in spring, with the help of Credit Suisse.

Lebanon has not had a president in place since last November. Its parliament has not been functioning and the government is hampered by the opposition’s claim that it is no longer legitimate. At the end of January, Standard & Poor’s cut its long-term sovereign credit rating on Lebanon from B- to CCC+ in response to this political impasse, for which it could see no easy resolution.

 

Closing the deal (l-r): Neil Slee, Chris Tuffey, Samantha Riley, Paul Hawker, Karim Elzein and Marco Huber

The agency warned that increased political instability “could shake confidence in the financial sector, thereby compromising domestic banks’ ability to lend to the government, and could delay reforms crucial to putting Lebanese public finances on a more sustainable path”. This may have focused the government’s mind on the $2.1bn-worth of Eurobonds that were due to mature in 2008.

If so, they had left it a little late. The first of these redemptions – $869m, to be exact – was due in March. Another $250m was due in May, the same again in June and $750m in August. At an estimated 188% of gross domestic product for 2007, Lebanon carries the third highest public debt burden in the world, after Japan and Zimbabwe. Much of it was run up when the nation rebuilt itself in the wake of the 1975 to 1990 civil war. And most of ­it is held by Lebanese banks, which were absolutely pivotal in this year’s ­refinancings.

A bond exchange

At the end of February, Credit Suisse and Bank Audi were asked to lead what, in effect, was going to have to be a bond exchange. One of the government’s difficulties is that Lebanon has borrowed to the limit. The government has no mandate to raise any incremental debt, even for a short period, and no immediate way of getting one, given the stasis in parliament. “It can not go into the markets to prefund because that would exceed its funding limits,” explains Christopher Tuffey, Credit Suisse’s head of EMEA debt syndicate and emerging markets DCM. “It can only roll over or redeem and reissue.”

An exchange was the obvious remedy, with investors swapping existing, maturing debt for new debt with a longer term. This was familiar territory for Credit Suisse, which had led Lebanon’s previous bond exchange – a $2.62bn transaction in April 2006. But the structure was not going to work for the March 2008 bond because there was not time.

“An exchange would have been preferable but we were only mandated three weeks before the maturity date,” says Paul Hawker, a director in fixed income structuring at Credit Suisse. “There wasn’t enough time to get the exchange documentation prepared and approved by the Luxembourg Stock Exchange.”

Difficult timing

The solution was to issue new bonds to refinance the $869m issue due on March 12, 2008. But the new issue had to be timed to settle on the maturity date of the old bond to avoid creating additional debt or – much worse – default. That was the hard part. “Normally, you would reserve the flexibility to move the pricing date and settlement date according to market conditions,” says Mr Tuffey. “We had to reverse towards a fixed closing date, with an aggressive time frame in an incredibly volatile market.”

The team announced a transaction on March 5 and did some fast and furious marketing in Beirut for a dual-tranche new issue. The original idea was to offer both three- and five-year maturities, to suit differing investor needs in a relatively illiquid market environment. “The feedback from accounts made it clear that the market preference was for the longer-dated maturity, as it offered the higher coupon,” says Neil Slee, vice-president, Credit Suisse emerging market debt ­syndicate. Coupon is what counts in the Middle East. But that suited the issuer, whose aim is to target longer maturities. Furthermore, a single transaction offered the benefits of greater liquidity. “So, we advised the ministry of finance to issue a single-tranche five-year offering,” says Mr Slee.

Investors were keen but not desperate and the $875m five-year bond was priced on March 7 with a 9.125% coupon, at the wide end of guidance. Pricing could have been tighter for a smaller transaction, the bankers say, but the issuer preferred to pay more for more. Reg S deals, as this was, typically take two or three weeks to settle. This one had five days, including a weekend.

No-one had time to savour its successful conclusion, however, because the bond exchange was looming and its timetable was just as demanding. The plan was to exchange all three outstanding issues for a single bond due in May 2014, and it had to be done before the first one matured, on 11 May 2008. And this time, there was a lot more paperwork involved.

Updating the programme

“Lebanon has a global medium-term note programme and this required updating in between our two transactions,” notes Samantha Riley, a director in Credit Suisse’s transaction management group. “The work had to be condensed into three weeks, which I think was probably record-breaking.”

The approach was to lay down a workable structure, based on the 2006 transaction, and to take it to the core investor base in Beirut, the Lebanese banks. The team carried out a more formal two-day roadshow in mid-April – all on a one-on-one basis – until it had spoken to a majority of the target bondholders.

The new issue in March had one very positive spin-off: it re-energised the market in Lebanese sovereign paper. Lebanon is not an active issuer. Its only appearance in the market since 2006 was a $400m tap in May last year and, with the current troubles, liquidity has been much lower than it once was. “When Lebanon raised $875m in new funding, it provided a lot of stimulus to the market,” says Mr Slee. “And it provided a benchmark for any appetite for new risk.”

By proving to investors – retail as well as institutional – that there was a market out there, the new bond had paved the way for the exchange. Then it was a question of how many bondholders could be persuaded to exchange, and at what price. The three maturing bonds were May 2008 (7% coupon), June 2008 (7.375%) and August 2008 (10.125%).

Launching the offer

Documentation was finished by the end of the roadshow, so the offer could be launched on April 17. Because they are addressed to a finite universe, exchange offers typically give the issuer less room for manoeuvre than in a new issue. The success of the March 2013 issue gave the team more leverage than they might have hoped. “Higher prices bring buyers,” says Mr Tuffey. The final terms for May 2014 were a coupon of 9% and repurchase premiums described by the team as “unusually low”.

Unsurprisingly, the participation rate among the May 2008 holders was 93%. It was 59% among the June target group and just less than 47% for the August holders, who were already enjoying a higher coupon. “The night before closing, we told the minister of finance that we could deliver 60% participation at these prices,” recalls Mr Tuffey. “The aggregate was 59%.”

As a tap of the exchange bond, a $150m incremental cash tranche was also issued to new local and international investors, who placed orders of $500m. The Credit Suisse team pays tribute to Bank Audi. “It is a big player in government securities in the Middle East and therefore a good partner for something like this,” acknowledges Mr Hawker.

Lebanon has never missed a payment on its debt, and even talk of default could have damaging effects on its domestic economy. So the stakes for this exercise were high. “All the parties had the will to get this to work,” says Mr Tuffey. “The investors were able to see where Lebanon was trying to get to, and that there was a plan. Ultimately, the plan was achievable, executable and – more importantly – realistic.”

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