Hopes are rising that Lebanon’s new government, following the election of army chief Joseph Aoun as president on Thursday, may finally start negotiations with its bondholders to address its defaulted debt.

The country stopped making payments on its US$29bn of Eurobonds in 2020 and has so far failed to sign off on a US$3bn programme with the International Monetary Fund, a precursor to working out what level of debt the economy can sustain. The proposed four-year loan was first set out in 2022.

In October, an IMF spokesperson said: "We are prepared to engage with Lebanon on a possible financing programme when the situation is appropriate to do so. But it would necessitate that the actions can be taken, and decisive policy measures can be taken."

The default sent the bonds down to as low as six cents in the dollar at the start of last year but they have nearly tripled over the past few months since a ceasefire between Israel and Hezbollah, the Iranian-backed organisation that has had a significant influence on Lebanese politics.

On Thursday the bonds rose by a further 2 cents, or 20%, to be bid at around 16.5 cents.

Lebanon’s current government indicated that it wanted to avoid costly litigation and reach an amicable agreement with its creditors. On Tuesday the council of ministers authorised current finance minister Yousef Khalil to have talks about “amending the [bonds’] terms and conditions”.

Khalil said: “Despite the difficult times we are living through, Lebanon remains committed to reaching a consensual and equitable solution to its Eurobond debt.”

The move was partly prompted by fears that bondholders would be forced to launch legal actions shortly because the New York statute of limitations means any such action must start within five years of the default, which was in March 2020.

In a statement the government said this deadline would effectively be extended by a further three years to March 9 2028.

It stated that it would not “assert defences to any legal actions in respect of the Eurobonds issued by it based on the expiration of the New York statute of limitations and any other prescription or contractual period”.

Khalil said: “By extending the prescription periods, holders of the Eurobonds will not be forced to take legal action due to a legal deadline, but will rather participate in an orderly and consensual process.”

A source close to the situation said the pace of any restructuring discussions would depend on the formation of the new government but was hopeful that talks with bondholders could resume. “It’s too early to tell for sure,” said the source.

The government statement is seen as helpful for any incoming administration to avert any possible legal action that might arise because of the need to lodge petitions ahead of the expiration of the statute of limitations.

Lazard and law firm Cleary Gottlieb have been advising Lebanon since 2020. Law firm White & Case was previously acting for the committee of international bondholders.

Any restructuring is seen as particularly complicated as Lebanon’s bonds have individual collective action clauses, and not ones allowing an aggregated vote across all the series of instruments. It will also be tricky since Lebanon's major creditors are its banks and they will need recapitalising.

Speaking about Auon's election, broker Tellimer said: "This is the first necessary step on a very long road to recovery: for investors, the next near-term steps are the appointment of a prime minister and the assembly of a cabinet, a commitment to initiating long-delayed structural reforms that should act as a catalyst for foreign financial assistance, and the follow through on a sovereign debt restructuring process that lapsed in 2020."

Tim Ash, EM sovereign debt strategist at RBC Bluebay Asset Management, said any new government would have to make “very difficult decisions” over how to fund a recapitalisation of the banking system, since it would require bailing in large depositors who “tend to be politically connected”.

He said: “There can be no IMF programme, and no debt restructuring unless a way forward is agreed on the huge hole in the banking sector.”

He also doubted there would be support from Gulf countries such as Saudi Arabia.

Source: IFR