On April 14, the Lebanese government missed a $700 million principal payment on its Eurobond, following its first default on March 9 on a $1.2 billion Eurobond. It also missed interest payments due on several other bonds in March and April.

We are therefore revising our rating on these bonds to 'D' (default) from 'SD' (selective default).

Moreover, we have identified the misapplication of "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings" in assigning an 'SD' rating to various debt issues on March 11. We are now correcting these errors by revising the ratings on defaulted bond issues to 'D' and the remaining issues to 'CC'.

Rating Action

On April 23, 2020, S&P Global Ratings affirmed its foreign currency long- and short-term sovereign credit ratings on Lebanon at 'SD/SD'. We affirmed our local currency long- and short-term ratings at 'CC/C'. The outlook remains negative.

Our transfer and convertibility assessment remains at 'CC'.

We also took the following rating actions on Lebanon's debt instruments:

We revised the issue ratings to 'D' from 'SD' on the March 2027, 2032 and 2037, and April 2021, 2024 and 2031 bonds with coupons payments due in March and April, respectively.

We revised to 'CC' our ratings on the remaining 14 bond issues that were changed to 'SD' in error on March 11.

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on Lebanon are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a default. The next scheduled publication on Lebanon sovereign rating will be on Aug. 21, 2020.

Outlook

The negative outlook on the local currency rating reflects the risk to local currency commercial debt repayments in the context of ongoing political, financial, and monetary pressures.

Downside scenario

We could lower the local currency issuer rating to 'SD' if the government signals that it will restructure local currency debt in addition to the Eurobonds.

Upside scenario

We could raise the rating if we perceived that the likelihood of a distressed exchange of Lebanon's local currency commercial debt had decreased. This could be the case if, for example, significant donor funding support were to materialize, allowing the government a window to implement immediate and transformative reforms, or if significant reforms led to sustained strong economic growth.

Rationale

The Lebanese government announced in March that it would stop paying all its commercial foreign currency debt obligations of about $31 billion, including a $1.2 billion Eurobond that matured on March 9, 2020. Lebanon also missed a Eurobond principal repayment due on April 14, along with interest due on several bonds in March and April.

Since March, the Lebanese government under Prime Minister Hasan Diab, with the support of external advisors, has made only limited progress in engaging creditors on debt-restructuring negotiations. The government unveiled a broad recovery plan to investors on March 27 covering general principles of structural economic, fiscal, banking sector, and exchange rate framework reforms. A recent draft report by Lazard, a financial consulting firm and one of the government's advisors, provides more detailed recommendations; however, it does not set out an implementation timeline, and proposed measures lack the government's endorsement at this stage.

In the absence of a comprehensive restructuring plan backed by all key political institutions and parties, and external support, we continue to expect the negotiation process will be drawn out beyond 2020. The challenges are compounded by the COVID-19 pandemic, which is dealing a further blow to already weakened economic activity and severe external, fiscal, and financial pressures.

Lebanon's currency peg to the dollar is steadily faltering, with ongoing foreign exchange shortages and a widening gap in the parallel exchange markets. In a recent circular, the Banque du Liban announced it would launch a foreign exchange unit to centralize the exchange rate used by money exchange houses. Another circular announced that small depositors could withdraw up to $3,000 from their bank accounts in Lebanese pounds at market prices. These policies indicate a move toward a dual or multiple exchange rate regime.

We would likely raise the foreign currency issuer ratings from 'SD' once a debt exchange or restructuring agreement between Lebanon and its creditors took effect. We could also upgrade Lebanon if we don't expect further resolution to occur and we believe a different rating better reflects our forward-looking opinion on Lebanon's creditworthiness.

We understand the government has currently not announced any restructuring of its local currency debt obligations, which represent about 110% of GDP (63% of total debt). Our 'CC/C' ratings on Lebanon's local currency debt reflects our expectation that domestic debt restructuring is inevitable if Lebanon seeks to set its public debt on a sustainable footing. The Lazard report suggests that the damaging impact on banks' balance sheets could be addressed, to some extent, by bail-ins from bank shareholders and a portion of depositors, as well as by mergers and liquidations. However, these issues will be politically and socially contentious.

In our rating action on March 11, we lowered the foreign currency long- and short-term sovereign credit rating on Lebanon to 'SD' from 'CC'. We also revised our rating on the maturing March bond issue that had defaulted to 'D'. At the same time, we revised all other outstanding bond issues to 'SD', which was an error in the application of "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Jan. 18, 2018. Under that criteria, we should have assigned 'CC' issue credit ratings to those outstanding bond issues to indicate that although a default has not yet occurred, S&P Global Ratings expects default to be a virtual certainty, regardless of the anticipated time to default. Today's actions correct these errors.