Debt Restructuring: the untold story of how Lazard and Cleary Gottlieb were chosen
Through several sources, linked to competing firms or circles of power, “L’Orient-Le Jour” was able to trace parts of the lobbying and influence game that took place until the two firms were chosen.
On Tuesday, February 25, less than an hour before the council of ministers convened in the morning to officially announce the selection of an international financial advisory firm and an international law firm that would support the Diab government in the debt restructuring process, a Finance Ministry advisor still wanted to believe that it wasn’t yet definitive. However, several sources on Sunday, February 23, have indicated to “L’Orient-Le Jour” that the choice had been made. It will be Lazard for the financial aspect and Cleary Gottlieb Steen & Hamilton LLP for the legal aspect.
But Lazard wasn’t the advisor’s favorite option. His last-minute attempt to postpone the cabinet’s meeting is an illustration of the war of lobbying and all-out influence (not only) between competing firms, but also between firms and politics, which had been going on for days. But his efforts were in vain, since the names of Lazard and Cleary Gottlieb were announced Tuesday afternoon by the government’s spokeswoman.
Twelve firms were competing for the financial aspect as part of the govern-ment’s request for proposals (RFP), announced on Wednesday, February 26: Rothschild & Co, Guggenheim Partners, Citibank, Lazard, JPMorgan, PJT Partners, Houlihan Lokey, Newstate Partners, Standard Chartered, Global Sovereign Advisory, Deutsche Bank and White Oak. There were three for the legal aspect: Cleary Gottlieb Steen & Hamilton LLP, White & Case LLP and Dechert LLP which includes former minister Camille Abousleiman.
As early as Sunday evening, the selection of Lazard and Cleary, after two days of intensive meetings by the selection committee, left many key players per-plexed, though they are accustomed to the merciless wars being waged by in-ternational firms to win such kinds of prestigious contracts. “It was organized in advance and there is no doubt about it,” one of the unsuccessful candidates stresses bitterly. “The world of debt restructuring is a world of sharks, but I have never seen such a thing. The complexity of the Lebanese political land-scape has added perversity to the games of alliances and influences in this se-lection process,” confides the representative of another firm.
Act I: Convincing Hassan Diab
The major firms actually initiated the games of alliances and influences several months ago, by making more visits to Beirut and activating their onsite net-works.
First mission: As Lebanon plunges into the crisis and an unprecedented popu-lar protest movement sweeping the country since October, the matter is about convincing local actors, either directly or through formal and informal interme-diaries, of the need to seriously consider a debt restructuring scenario.
As an issue of Eurobonds matures in November 2019, international firms spe-cializing in debt-restructuring operations have a first setback when the central bank’s governor, Riad Salamé, says he is ready to secure – on behalf of the state – the repayment of creditors. The lack of political visibility reinforces his choice: No one knows at this point what the future government will look like, after Prime Minister Hariri’s resignation a few weeks earlier, or its chances to negotiate international financial assistance. In this context, the few voices that then stand to advocate, in light of a currency liquidity crisis, the non-use of the Bank of Lebanon (BDL)’s dollar reserves to repay the Eurobonds are inaudi-ble.
When Hassan Diab took over, on January 21, as the head of the new govern-ment, supporters and opponents of an organized default by the state, came one after the other to his office. But at that point, Riad Salamé was one step ahead: He proposed a voluntary Eurobonds swap with the local banks, which could have enabled the BDL to take possession of the vast majority of those bonds that mature in 2020 and thus recover a large part of the reserves intended for their repayment.
Problem: The banks, not convinced, decided to sell their 2020 Eurobonds in the secondary market before reaching an agreement with the Ashmore fund, a London-based management firm active in emerging markets. The result: Ash-more now has USD 1 billion in Lebanon’s bonds, including nearly USD 300 million in March 2020 bonds.
This development was a game-changer. The political circles that sponsored the new government, by granting it confidence in parliament, increased pressure on Hassan Diab by publicly speaking out against a repayment of the Eurobonds issue maturing on March 9, 2020. On the other hand, if the prime minister seems to understand the need to initiate a debt restructuring process, he balks at the idea of seeing his mandate linked to “a default” or even “a bankruptcy of the state.”
Act II: The positioning of Camille Abousleiman and Lazard
As the debate on whether or not to repay the March Eurobonds is sweeping all of Lebanon, the government decides to request help from the former minister and specialist in the debt market, Camille Abousleiman, who, quickly, said he was willing to offer his expertise free of charge to the Diab team.
Abousleiman, who returned to his London-based Dechert office after the resig-nation of the Hariri government, prepared a Consent Solicitation to interna-tional Eurobonds holders, a 15-point action plan, and the necessary documents to schedule an extension of the maturity of these bonds. But Camille Abousleiman isn’t the only one on the field.
Lazard’s team has been on the move for some time and has been offering the government its kind help for the financial aspect. The co-chair of Lazard Paris, François Kayat, is personally involved in the matter. Another heavyweight of the Paris office, the director for the Middle East and Africa, Xavier Atieh, is also involved. He knows well the minister of Environment, Damien Kattar, the trusted man of Hassan Diab. It went well, too, with the minister of Fi-nance, Ghazi Wazni.
After a few days of work, Camille Abousleiman and Lazard accompany the government in its first attempt to negotiate with Ashmore, which dispatched representatives to Beirut. The meeting goes “very bad,” reports a source close to the matter. Ashmore requires reimbursement. However, by holding 25% of the March issue, the fund is able to foil any vote for restructuring this issue that wouldn’t suit it.
Act III: Launching the RFP
With the prospect of reaching an agreement with Ashmore fading, the Diab government is forced to move forward. But a problem occurred : On February 17, media reports that the government has called on the services of Camille Abousleiman. If the news reassures some observers, because of Mr. Abouslei-man’s profile, it annoys others.
In the context of the popular revolt that is engulfing Lebanon, transparency is more than ever a grievance voiced by the street. It is also supported by the or-ganization Kulluna Irada, an increasingly influential lobby in public affairs, which advocates an immediate restructuring of public debt and calls for a transparent RFP for the selection of an international law firm and an interna-tional financial advisory firm.
It is in this context that the Finance Ministry launches two RFPs on February 19, one for the legal aspect and the other for the financial aspect. Three firms, including Abousleiman’s, are for the legal aspect, and twelve for the financial aspect. They have two days to submit their bids.
The RFP for the legal aspect was prepared, among others, by Lazard, and the one for the financial aspect by Camille Abousleiman. This is standard practice, and these RFPs are generally standard formats that are slightly adapted to each case. In fact, all the candidates interviewed by “L’Orient-Le Jour” describe the RFPs as “extremely well written.”
Many of them make clear that the required task is limited to Eurobonds held by external creditors. Again, “nothing is surprising,” according to the firms. “This is a first step. Perhaps the most urgent.” It is also clear that whatever de-cision is made on the March deadline, it will be announced only one to two days before the fateful date.
Act IV: “Camille Is Out.”
The day after the RFPs were launched, the anti-Abousleiman offensive began with an incendiary article published by the daily al-Akhbar. Among other things, the man who has worked on Lebanese international bond issues since 1995 is accused of writing Eurobond contracts largely in favor of creditors. This is since the contracts don’t provide for a “collective action clause” that would allow the state to negotiate the terms of debt restructuring all at once but require an issue-by-issue vote of these terms with 75% consent instead of a simple majority. A few hours after the publication of the article, journalist Marcel Ghanem reinforces the accusations in his primetime Sar el-Wakt broad-cast on MTV. “This is a scandal. There is a conflict of interest. An investiga-tion must be opened,” denounces the star host.
As Marcel Ghanem refused to allow Mr. Abousleiman to comment during his show, it was on Twitter that the latter defended himself the next morning. “Conflicts of interest are subject to strict rules that apply to international law firms, and my firm respects them perfectly,” he writes. The former minister stresses in comments to L’Orient Le Jour that if his firm isn’t selected by the government, he won’t apply to represent creditors. The line of defense is clear, but the damage is done.
“Camille Abousleiman has made many enemies. Not all the reasons that have been raised to dismiss him are necessarily correct, because his competence isn’t disputed. But what is certain is that it is better not to have a politically labeled person at the command of such a mission,” confides one of the sources inter-viewed by the “L’Orient-Le Jour.”
In fact, the Diab government informs Camille Abousleiman that he is now out of the game. In a seething Lebanon, it is better to avoid controversy.
Act V: The Weekend of All Maneuvers
Friday, February 21. The Finance Ministry receives the proposals. While it had been announced that it would open the proposals on the same day, the meeting of the selection committee was postponed to the following day. If this post-ponement isn’t suspect in itself, most candidates worry that they haven’t been given the proposals’ rating grid, unlike in other countries. “Practice dictates that the experience of the team mobilized, the CV of each of its members, the reputation of the firm and its technical proposal be initially evaluated by a committee. It is on these criteria that a first pre-selection is made. Shortlisted candidates are announced, and it is only then that the committee meets a sec-ond time to open the financial proposals and make the final selection,” ex-plains one of the unfortunate candidates, who made clear that nothing of this was done in Beirut.
On Saturday, shortly after 5 p.m., a source close to the matter affirms to “L’Orient-Le Jour” that the committee meeting is about to begin and that, “in principle, it will be Lazard and Cleary.” Why so much certainty? It is still un-known.
The committee is chaired by the Defense minister, Zeina Acar, in her capacity as deputy Prime Minister. Around the table are the Finance minister, Ghazi Wazni, the Economy minister, Raoul Nehmé; and the Justice minister, Marie-Claude Najm. The advisors to the Prime Minister, Georges Chalhoub and Ah-mad Jisri, and the adviser to the Finance minister, Talal Salman, are also pre-sent. Other names were mentioned by one of our sources, but we couldn’t double check this information.
The committee begins by checking the proposals submitted by the financial advisors. On paper, the favorite, Lazard, is as often in competition with Roth-schild. The latter managed to attract from Lazard, less than a year ago, their greatest specialist in debt restructuring: Eric Lalo. And it was the latter that Rothschild chose to lead the Lebanon team, alongside in particular Georges Amatoury. The two firms share square-handedly, on their own, the majority of the international debt restructuring market.
Lazard has however a major advantage. According to three different sources, the finance minister has vetoed Rothschild: “Their name is too heavy,” he con-fided to several of his interlocutors. The Lebanese government has therefore advised them to maintain their candidacy, but only to establish a tacit pact with another candidate to sustain their chances; what Rothschild will do with Citibank.
When the committee opens up the financial proposals, it comes to a big sur-prise: Lazard’s fee is much higher than those of its competitors. The committee calls Lazard and asks it to lower its fee. Lazard accepts but doesn’t under-stand, initially, that it will have to reduce its proposal by 50% to become com-petitive. The main challenger this time is Citibank. Nevertheless, the committee is still moving towards a non-final selection of Lazard, indicate several sources on Saturday evening.
The committee then deals with the proposals of law firms. Dechert doesn’t yet know that it is permanently out of the game; it tries all its best: Camille Abousleiman’s services bear no charges. The proposal is very competitive, but for the reasons mentioned above, it will at no time be seriously considered.
The choice is therefore between Cleary Gottlieb and White & Case. The White & Case team is led by Ian Clark, a heavyweight in the debt restructuring world. He is accompanied by Charbel Abou Charaf. Cleary Gottlieb – which recently lost its own heavyweight, Lee Buchheit, upon his retirement – also has a very good team, led by Andres de La Cruz and Richard Cooper, who are assisted by Lynn Ammar.
Cleary Gottlieb’s initial proposal is 66% higher than White & Case’s. Follow-ing telephone negotiations with the committee, both firms agree to lower their bids. The result: Cleary Gottlieb is still 60% more costly than White & Case. On Saturday evening, sources indicate to “L’Orient-Le Jour” that the commit-tee is moving toward a non-final selection of White & Case.
On Sunday, a few hours before the committee meets again to decide on the matter, it receives a new unsolicited proposal from Cleary Gottlieb. This time, the firm offers a slightly higher price (7.5%) than its competitor. It mainly re-duces its lawyers’ fee (billed hourly) in the event of litigation, while this poten-tial phase isn’t provided for in detail by the RFP. White & Case, having not anticipated the blow, is 25% higher than Cleary Gottlieb, who will eventually be selected.
How and why did Cleary Gottlieb’s team decide to submit on Sunday a new proposal, so close to White & Case’s? Several sources suspect that Cleary Gottlieb’s team have had access to details of the financial proposals of their competitors. However, this is formally denied by a source close to Cleary Gottlieb.
At the Sunday meeting, with regard to the financial aspect, Lazard, on a second solicitation by the committee, put on the table a new proposal, with a still low-er fee. The pro-active attitude of the committee toward Lazard would, accord-ing to several sources, be linked to the firm’s profile. The lobbying work launched well in advance by the cabinet has also worked in its favor. At the end of this second committee meeting, the final decision was reached: It will in-deed be Lazard and Cleary Gottlieb. In the opinion of all solicited interlocutors, the committee has remarkably well negotiated the fees of the financial pro-posals downwards. Without necessarily challenging the competence of select-ed firms, many recall that for this type of RFPs, the weighting of the finan-cial proposal is minimal compared to the technical proposal in the final rat-ing. “In all major RFPs, there is often a small cooking intended to promote certain candidates over others. It is part of the game and it is not unique to Lebanon. But in this specific case, irregularities and inconsistencies are glaring for deals worth a few million dollars. This is not reassuring for the future,” summarizes a source close to the matter.
Former minister and debt market specialist Camille Abousleiman, whose firm Dechert LLP was one of three candidates for the legal aspect of the request for proposals (RFP) launched on February 19 by the Finance Ministry and eventually won by Cleary Gottlieb Steen & Hamilton LLP (for the legal aspect) and Lazard (for the financial aspect), wished to respond to two points raised in the article above.
The first point concerns issues initially raised last week in an article in the daily al-Akhbar and carried by L’Orient-Le Jour. We wrote that in al-Akhbar’s article, Mr. Abousleiman is “accused of writing Eurobond contracts largely in favor of creditors." This is since the contracts don’t provide for a “Collective Action Clause” that would allow the state to negotiate the terms of debt restructuring all at once but require an issue-by-issue vote of these terms with 75% consent instead of a simple majority.”
Here is the clarification given by Mr. Abousleiman to L’Orient-Le Jour on this first point:
“Collective Action Clauses (CACs) came into force in 2015. Immediately, by a letter dated July 1, 2015, I recommended that the finance minister adopt the clauses and establish a new Eurobonds program, governed by British law, which presents less legal risks to the Lebanese state as an issuer. Working with the Finance Ministry’s team and the program’s arrangers, we had finalized a new program, containing the CACs, but the then-finance minister didn’t forward this proposal to the council of ministers, for reasons unknown to me, despite my insistence and that of the program arrangers. Since the CACs came into force, Dechert has always incorporated them in other countries’ Eurobond programs, including Egypt, Tunisia and Morocco. It should be noted that Lebanon’s governmental commission didn’t raise the issue of CACs during our discussions.
Given that much of our Eurobonds were issued before 2015 and the CACs aren’t retroactively applicable, these clauses would have been of limited use to Lebanon, as they wouldn’t apply to existing series. Hence, the importance of their absence shouldn’t be exaggerated. As proof of that, note that Ukraine has completed the restructuring of its Eurobonds in a favorable way for the state, despite the absence of the CACs.”
Mr. Abousleiman also denied that the Diab government had informed him that he was “out of the game,” following a media campaign that targeted him personally:
“That is not the case. I wasn’t informed by the Diab government that Dechert was out of the game. Dechert’s offer was undoubtedly the most competitive, because my legal services were offered free of charge. I respect the government’s choice of financial and legal consulting firms, and wish them success in their mission."
(This article was originally published in French in L'Orient-Le Jour on the 27th of February)