[The REDD Insight is a market comment produced by senior members of the REDD Intelligence newsrooms and research departments. The views expressed in this report are solely those of the author(s) and are not necessarily shared or endorsed by REDD.]
“Legal professionals, like the priests of some obscure religion, too often try to keep the law mysterious and inaccessible.” — Jay Feinman
Israel’s recent advances against Hezbollah in Lebanon have breathed life into an otherwise muted market for the latter’s Eurobonds, spotlighting legal provisions pertaining to past due interest (PDI) claims of some USD 22bn of such notes outstanding across 20 issuances.
While provisions in Lebanon's Eurobonds do not foresee any need for action from bondholders until 2026, there has been some market chatter suggesting that PDI claims might expire next year. The confusion stems from the wording of a legal provision in the bond documentation that some investors interpret as implying they have five years from default—which occurred in March 2020—to claim PDI and 10 years to claim unpaid principal.
The concern is that should investors be unable to claim PDI past March 2025, then it would reduce their total claims in a restructuring, prompting questions about whether bondholders should consider legal action before that, several buysiders told REDD.
Decoding legalese
Lebanon’s Eurobond documents have two legal provisions relating to the validity of outstanding claims in the context of a time period, according to a legal source close to the situation.
The first is a statute of limitations for enforcement of contractual claims as stipulated by the New York law, which governs Lebanese notes. The statute states that holders lose their right to claim if they fail to exercise it within six years of default. In Lebanon’s case, the six-year period will kick in gradually from 2026, with exact timing depending on the specific bond series, the legal source said.
The second is a prescription clause (condition 9) in a fiscal agency agreement (FAA) under the Lebanese bond issuance program (see attachment). The wording of the clause has caused confusion among market participants, leading some to believe that the expiry of the PDI claims may start kicking in from 2025.
“It is a poorly written clause,” the legal source said, adding that what has been overlooked by some in this clause is the definition of the date from which the countdown starts toward the claims’ expiry.
The prescription clause in the Lebanon’s FAA reads: “The Notes, Receipts and Coupons will become void unless presented for payment within a period of 10 years (in the case of principal) and five years (in the case of interest) after the Relevant Date (as defined in Condition 8) therefor.”
In the preceding clause, the relevant date is defined as “the date on which such payment first becomes due, except that, if the full amount payable has not been duly received by the Fiscal Agent or, as the case may be, the Registrar, on or prior to such due date, it means the date on which notice is given to the Holders, in accordance with Condition 14, that the full amount has been received.”
According to the legal source, “the relevant date has not occurred yet” because Lebanon has not transferred any amounts under its Eurobonds to its fiscal agent since 2020. Hence, the agent could not have given a notice about such a receipt to the holders.
This means that the nearest year of potential concern to bondholders as far as the claims’ expiry goes is 2026, when the New York law statute of limitations kicks in, the source explained.
Deutsche Bank Trust Company Americas, acting through its principal corporate office in New York, is the fiscal agent, the registrar, the exchange agent and the transfer agent under Lebanon’s USD 22bn global medium-term notes program.
Restructuring hopes
The Lebanese bonds have seen muted activity for the last few years, as the political stalemate in Lebanon prevented the country from moving forward with a debt restructuring.
Still the lowest-valued paper in CEEMEA, the notes have traded up from 6.5 to above 9 cents over the last few weeks as value hunters bet that Israel’s advances against Hezbollah in Lebanon might provide an opening for the formation of a new government and a debt restructuring next year, as reported.
The legal source said such hopes are likely overly optimistic given the deeply ingrained complexities of the Lebanese politics and economy.
Hezbollah, the Shia Islamist group backed by Iran, has been seen as one of the biggest obstacles to forming a new government in Lebanon and the country obtaining new external bilateral funding. Both are needed for the International Monetary Fund (IMF) to approve a bailout program for Lebanon and for its debt restructuring to take place, as reported.
The country’s troublesome banking sector has presented another major issue for the IMF. Lebanon’s financial sector accumulated more than USD 72bn in losses since the 2019 economic crisis, according to the US Department of State’s statement on Lebanon in April. The banks, represented by the Association of Banks in Lebanon, rejected the government's restructuring proposals that asked the banking sector to recognize and absorb the losses in the years after the default.
The IMF and the Lebanese government reached a staff-level agreement on proposed economic reforms in April 2022. However, as of April 2024, only limited progress on the proposed economic reforms has been made by the Lebanese, the State Department said in its statement, adding that “persistent political paralysis” remains the primary obstacle to undertaking the reforms.
As distressed debt investors increasingly bet on this paralysis to ease going into 2025, the bonds’ legal provisions are set to remain under scrutiny.
by Yulianna Vilkos and Giovanni Riva