Restructuring Lebanese Sovereign Debt: Tackling the Holdout Problem

Abstract

Lebanon can threaten to take the following three actions to restructure its debt and weaken the position of a potential holdout creditor, such as the Ashmore Group, that holds more than 25% of the outstanding debt.

First, unilaterally amend the terms of the Fiscal Agency Agreement pursuant to Para. 23.1 to allow bondholders representing a simple majority of the outstanding debt to amend non-core terms, contrary to the 75% required to pass an extraordinary resolution.

Second, initiate the debt restructuring through a debt exchange program with an exit consent that requires participating bondholders to vote to amend the two non-core terms in the Fiscal Agency Agreement: (1) amend the forum selection clause to ensure that in the event of default, the creditor may only bring a lawsuit against the debtor in a Lebanese court (para. 8.3); (2) remove the pari passu clause (para. 3).

Third, the Lebanese Parliament enacts a law effectively accomplishing that (1) the New bonds are senior to the Old Bonds; (2) the government may make selective payments on its senior debt until they are paid in full without resulting in default on junior claims; (3) successful creditor-litigants have the obligation to apply the proceeds of a successful judgment against Lebanon to senior creditors.

In the event that Lebanon fails in these three actions, Lebanon can still rely on the necessity doctrine as an affirmative defense.

Keywords: Lebanon, Sovereign Debt Restructuring, Collective Action Clause, Exit Consent, Necessity Dotrine, Local Law Advantage