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French Version

Lebanon may issue more eurobonds in next few months (Daily Star)

Beirut wants to benefit from low interest rates
Local banks have bought up most of the
issue and are expected to subscribe heavily to future offerings

After the recent successful issue of $1.2 billion in eurobonds, the Lebanese Finance Ministry is considering issuing more such bonds over the next few months to take advantage of low interest rates in international markets.

Sources close to the ministry said the expected amount would be around $400 million or $500 million. They added that banks were ready to buy most of the new eurobonds.

Most of the $1.2 billion issue was snapped up by Lebanese banks and financial firms that already hold most of the government's debt. Pension funds in the United States and Europe grabbed 15 percent of the eurobonds, reflecting the confidence of the international community in Lebanon.

Out of the $1.2 billion in eurobonds, $950 million was denominated in dollars, with a seven-year maturity and an 8 percent yield, while the remaining $250 million was in euros, with a 7.25 percent yield. Previous yields for other sovereign eurobonds ranged between 9 and 10.50 percent.

Lebanon's new dollar-denominated bonds have a spread of 366 basis points over US Treasuries. Its euro-denominated issue has a spread of 370 basis points above German government bonds.

The issue replaced maturing eurobonds this year, and in 2005 the government will have to settle another $1 billion worth of similar bonds.

International investment bank Merrill Lynch has recommended that investors buy Lebanese eurobonds. Lebanon is rated B- among emerging markets and managed to obtain a low yield on the eurobonds this year after negotiations with investment banks.

The government authorized the ministry to issue $1.9 billion in eurobonds in 2004 to bankroll the maturing issues. The total of outstanding eurobonds issued by the government since 1994 has exceeded $17 billion, or about 50 percent of the total public debt, estimated at $33 billion. With customer deposits of more than $50 billion, commercial banks are more than eager to use part of their cash to buy the eurobonds, even at below market rates.

Joe Sarrouh, adviser to Fransabank's chairman, said it was normal for banks to snap up most of the issue, because the market is very liquid. He added that the government did the right thing by issuing the eurobonds this month."I expect the US Federal Reserve to raise dollars during this summer," Sarrouh said, adding that it is better to borrow now while the rates are low.

Sarrouh stressed that economic and political stability in the country has encouraged pension funds and financial firms in the West to snap up some of these eurobond issues.

Observers say despite the difficulties the country has faced, the Lebanese government has never defaulted on payments. The government has been borrowing from local and international markets to finance the public debt, because there have been no radical solutions to the financial crisis.

Privatization and securitization have been put on hold until further notice, due to sharp differences between top political leaders. International rating agencies Standard & Poor's, Moody's and Fitch lowered the credit rating of Lebanon two years after the "Paris II" conference that secured $2.5 billion in soft loans to help reduce debt servicing.

Sarrouh said that Lebanon had no choice but to roll over the maturing eurobonds as long as the government was unable to reduce the public debt."Eventually, the government will realize it has to privatize to check the rise of the public debt, but I don't believe anything will happen this year," Sarrouh said.

Central Bank Governor Riad Salameh warned repeatedly that public debt may reach more than $35 billion at the end of 2004 if no solution is found. He added that the government should securitize the future revenue of the tobacco sector and the telecom sector, which would bring in $2 billion.

Lebanon needs $5 billion from privatization of the telecom and electricity sectors so it can reduce the public debt and cut interest rates further.

background on past issues

The first eurobond issue launched by the Lebanese government was in October 1994, for $400 million. The three-year issue carried a coupon of 10.125 percent and was managed by the US investment bank Merrill Lynch. Since then, the government successfully tapped the local and international markets as investors showed interest in the sovereign bonds. Apart from the $1.2 billion in eurobonds issued by the government this month, the government has sold over $16.67 billion of these bonds, $12.718 billion of which are still outstanding. In principle, the government issues large amounts of eurobonds to help finance the public debt, which has reached $33 billion. Most eurobonds issued by successive government are held by local commercial banks, which means increased exposure to the public debt. Merrill Lynch maintained its recommendations on Lebanese eurobonds for the 18 consecutive months and slightly increased its market weighting allocations to 2.3 percent from 2.2 percent in its model emerging markets' portfolio.

Beirut 24-05-2004
Osama Habib
The Daily Star

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