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| 13 March, 2018

Goldman Sachs: Lebanon’s Eurobonds undervalued

Global investment bank Goldman Sachs has said Lebanon’s sovereign Eurobonds are worth much more than their current prices.

Image used for illustrative purpose.
A Goldman Sachs sign is seen above the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York January 24, 2014.

Image used for illustrative purpose. A Goldman Sachs sign is seen above the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York January 24, 2014.

REUTERS/Lucas Jackson

BEIRUT - Global investment bank Goldman Sachs has said Lebanon’s sovereign Eurobonds are worth much more than their current prices. The remarks came in its valuation of the sovereign credits of 56 emerging market countries, including Lebanon. Goldman Sachs indicated that the country’s Eurobonds that have a maturity of three to seven years are undervalued.

According to Byblos Bank, which quoted the report, Goldman Sachs used a model that estimates which sovereign bonds are “undervalued,” “fair” or “expensive” by comparing the difference between the actual spreads on bonds and the model-implied spreads.

“The difference between the actual spread of 445 basis points on Lebanon’s Eurobonds and the Goldman Sachs’ model-implied spread of 355 bps shows that the undervaluation is at 90 bps,” the Byblos Bank report explained.

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The model-implied valuation metric is based on the current level of investor risk appetite, as well as on the current and expected future path of macroeconomic fundamentals in emerging markets,” the report added.

Lebanon’s outstanding Eurobonds at the end of January 2018 stood at $27.8 billion.

The government usually taps the local and international markets to finance public debt, which is more than $80 billion in the form of Treasury bills and Eurobonds.

The bulk of the Eurobonds are held by the Lebanese commercial banks and Banque du Liban.

The valuation by Goldman Sachs should encourage investors to buy Lebanon’s Eurobonds in the hope that the prices will rise in the future, according to experts.

The report said that Lebanon’s Eurobonds, along with those of Tunisia (41 bps), are the only “undervalued” bonds among 21 B-rated sovereigns included in Goldman Sachs’ universe.

“The bank noted that the actual spread on Lebanese Eurobonds is the third-widest spread among the 21 B-rated and 56 emerging markets.

Goldman Sachs also considered as undervalued the Eurobonds of two sovereigns in other rating categories. They consist of one AA-rated country and one BBB-rated sovereign,” the report said.

Furthermore, Goldman Sachs classified Lebanon’s Eurobonds that have a maturity of seven to 12 years as undervalued.

“The difference between the actual spread of 485 bps on Lebanon’s Eurobonds and the Goldman Sachs’ model-implied spread of 376 bps shows that the undervaluation is at 109 bps,” the report said.

“Further, Lebanon’s long-term Eurobonds were the only undervalued bonds among 21 B-rated sovereigns,” it added.

“Goldman Sachs indicated that the actual spread on long-term Lebanese Eurobonds constituted the third-widest spread across each of the 21 B-rated countries and 48 emerging markets.”

The investment bank also classified as undervalued Lebanon’s Eurobonds that have a maturity of 12 years or higher.

“The difference between the actual spread of 478 bps on Lebanon’s Eurobonds and the Goldman Sachs’ model-implied spread of 371 bps shows that the undervaluation is at 107 bps.

“Lebanon’s extra long-term Eurobonds, along with those of Argentina (48 bps), were the only undervalued bonds among 10 B-rated sovereigns,” the report said.

“Goldman Sachs indicated that the actual spread on long-term Lebanese Eurobonds, along with the spread on long-term Pakistani Eurobonds, constituted the widest spread across 10 B-rated countries and the second-widest among 36 emerging markets.”

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