Ashmore’s $1bn bet on Lebanon has become entangled in a political row, as public pressure rises for the cash-strapped country not to repay its creditors and as authorities in Beirut probe debt sales by local banks.
Prices of short-dated bonds have tumbled as investors calculate that it has become more likely that Lebanon’s debt will be restructured. The $1.2bn bond due to be repaid on March 9 — of which London-based Ashmore owned more than $300m at the end of December — was trading at 56 cents on the dollar on Friday. It is down from 75 cents at the end of last week.
The London-based asset manager, led by billionaire Mark Coombs, also held at the end of last year more than 25 per cent of two further Lebanese dollar bonds maturing in April and June. That is above the threshold required to block a restructuring of those bonds.
In Lebanon there is a growing civil backlash against the idea of repaying the bond next month, given the dire state of the country’s finances and stringent capital controls.
Sami Nader, director of the Levant Institute for Strategic Affairs, said public opinion is now mostly in favour of the country defaulting. “Because, they say, ‘how come you are not able to give me my $100 a week and you’re paying an international institution $1bn?’”
Anger toward local banks has been fanned by the perception that they sold some of their bondholdings and “let foreigners get a minority blocking stake,” added Mr Nader, noting that this would allow foreign funds to freeze external assets held by Lebanon.
Nabih Berri, the country’s parliamentary speaker, was quoted in local media backing a debt restructuring. Mr Berri heads a political party that is seen as close to Hizbollah, Lebanon’s dominant Shia Islamist paramilitary and political bloc, so his comments were widely interpreted as signalling Hizbollah’s endorsement of a default.
The central bank has sufficient gross foreign currency reserves to pay Lebanon’s creditors this year. But its net foreign currency reserves — after deductions such as commercial banks’ deposits of dollars — are negative, according to rating agency Fitch, and a liquidity crisis has made it hard for companies to get dollars to pay for imports.
Ashmore, which manages $98bn of assets, has continued to buy short-dated government bonds as prices swung wildly back and forth this year, according to traders and investors in the market. This included buying ahead of a proposed debt swap orchestrated by the central bank, which would have seen holders exchange their bonds maturing in 2020 for longer-dated debt.
Central bank governor Riad Salameh on January 3 said at a meeting with banks that “one of the most important foreign funds with regards to Lebanon’s debt” was open to the swap.
The swap plan collapsed later that month after rating agencies warned it would constitute a “selective default”. Some local banks refused to participate, instead choosing to offload their bonds at a discount to foreign buyers.
Ashmore declined to comment.
The justice ministry has launched a probe into bond sales by local banks, according to a person familiar with the ministry’s thinking, including whether or not the deals were made under repurchase agreements. Such structures could have helped local lenders generate much needed cash, while limiting risks for the buyer.
The central bank’s public relations office did not respond to multiple calls. Marie-Claude Najm, the justice minister who told local media she had ordered an investigation into the bond sales, did not respond to requests for comment.
The newly appointed Lebanese government is under popular pressure to show that it is trying to hold the financial sector accountable, leading some bankers to criticise the justice ministry’s move. One senior regulator called it “pure populism”.