Grounded in Debt: How Could Eurobonds Endanger MEA’s Assets?

12 February 2025

With the formation of a new government, and the hope for external financial assistance, the influx of hard currency into the Lebanese treasury might stimulate the action of Eurobonds holders to assert their claims more aggressively. Since Lebanon's default in early 2020, the Eurobonds holders have abstained from suing the Lebanese state for various reasons such as the “insolvency” of the treasury, but if aid is provided, what assurances exist that bondholders will not seize the opportunity to demand full repayment, potentially derailing economic recovery efforts?

What assurances exist that bondholders will not seize the opportunity to demand full repayment, potentially derailing economic recovery efforts?

Eurobonds are debt instruments issued in a currency different from the domestic currency of the country where they are issued. For instance, successive Lebanese governments initially issued treasury bonds denominated in LBP, the local currency, but resorted thereafter to borrow in foreign currency, thus issuing bonds in USD. Since BDL does not possess a USD “printer”, and given the liquidity crunch following the financial crisis in 2019, the Lebanese government defaulted on foreign currency debts, which are mainly constituted by Eurobonds, with an estimated value of 30 billion dollars, equivalent to 130% of Lebanon’s GDP, a dangerously high debt-to-GDP ratio by global standards.

Eurobonds' value is equivalent to 130% of Lebanon’s GDP, a dangerously high debt-to-GDP ratio by global standards.

By the end of 2022, the vast number of Eurobond holders were foreign entities, while local banks retained $2.9 billion of Eurobonds in their portfolio, exposing Lebanon to the foreign creditors’ discretionary decision in regards to exercising their legal rights, given the absence of a Collective Action Clause (CAC) in the legal framework of Lebanese-issued Eurobonds, which are submitted to the creditor-friendly jurisdiction of the New York legal system in the choice of law clauses.

The procrastination of the Lebanese government in indulging in debt-restructuring negotiations in the absence of a clear plan or vision to address the issue raised serious concerns among creditors, since the statute of limitation of suing for a bond debt is 6 years as per the New York state’s Civil Practice Law and Rules (N.Y. CPLR § 213), thus jeopardizing the holder’s ability to file a lawsuit against the Lebanese state and enforcing the payment of the debt. However, to assuage creditor concerns and prevent a rush to litigation, the Lebanese Council of Ministers unanimously adopted a resolution suspending, until 9 March 2028, the Republic's right to raise any defenses in relation to legal proceedings concerning the Eurobonds in accordance with Section 17-103 of the New York General Obligations Law which stipulates for the ability to waive the statute of limitation.

The Lebanese Council of Ministers unanimously adopted a resolution suspending, until 9 March 2028, the Republic's right to raise any defenses in relation to legal proceedings concerning the Eurobonds.

The decision of the Lebanese government may comfort bond holders but does not guarantee that lawsuits will be avoided, if they perceive the current circumstances as a strategic opportunity to recover their funds, especially given the potential influx of external assistance.

Despite Lebanon's severe financial distress, legal action against the state or its public entities remains a viable and potentially valuable course for creditors. Disregarding the fact that such a lawsuit will further deteriorate the Lebanese financial system’s credibility from the perspective of foreign entities such as investors and correspondent banks, such action has several legal implications far beyond the “moral” harm incurred by the Lebanese state as they could set precedents for future claims and influence debt restructuring negotiations.

Despite Lebanon's severe financial distress, legal action against the state or its public entities remains a viable and potentially valuable course for creditors.

As per foreign assets, and in relevance to the Foreign Sovereign Immunities Act of 1976 (FSIA), foreign assets owned by states or their subsidiaries such as state-owned entities are often protected from attachment, execution, or enforcement of judgments by state immunity, unless these entities engage in commercial activity, with properties of a foreign central bank or monetary authority held for its own account enjoying full immunity notwithstanding the existence of the exception. Similarly to central banks, if the property is, or is intended to be, used in connection with a military activity and is of a military character, or is under the control of a military authority or defense agency, it shall enjoy immunity.

Accordingly, are Middle East Airlines (MEA) assets in danger?

Middle East Airlines, Lebanon’s national carrier, is primarily owned by BDL (Central Bank of Lebanon). Despite this substantial ownership by BDL, MEA functions as an independent commercial entity with administrative and financial autonomy, offering passenger and cargo transportation services, managing its own operations, and competing in the international aviation market. This operational structure indicates that MEA operates with a level of autonomy typical of commercial enterprises rather than a sovereign instrumentality.

In the context of the Foreign Sovereign Immunities Act (FSIA), U.S. courts assess the nature of an entity's activities to determine immunity. Given that MEA engages in commercial activities similar to private airlines, it is likely that a U.S. court would classify MEA as a commercial entity. Consequently, MEA would not be entitled to sovereign immunity under the FSIA's commercial activity exception, despite its ownership by BDL. 

For instance, in OBB Personenverkehr AG v. Sachs (2015), the U.S. Supreme Court confirmed that state-owned transportation services are commercial enterprises under FSIA.

BDL's main functions include monetary policy, financial stability, and currency issuance, whereas MEA's operations in passenger transport and commercial aviation are unrelated to central banking; courts typically grant central banks immunity for monetary authority actions but not for commercial activities conducted through subsidiaries. In EM Ltd. v. Banco Central de la República Argentina (2010), Argentina’s central bank was protected under FSIA, but its commercial dealings were still subject to scrutiny.

Courts typically grant central banks immunity for monetary authority actions but not for commercial activities conducted through subsidiaries.

Lebanon's ability to repay its Eurobonds is severely limited by its fiscal and economic collapse. Prior to the crisis, the country relied heavily on remittances, foreign aid, and an overleveraged banking sector to meet its financial obligations. Since 2019, however, Lebanon’s GDP has plunged from over $55 billion to approximately $23 billion, while government revenues have sharply declined to an estimated $4-5 billion annually according to IMF’s Data. Meanwhile, expenditures on salaries, subsidies, and essential services exceed revenues, leaving Lebanon with a primary budget deficit, unable to generate enough income to cover operational costs, let alone service its debt. The risks Lebanon faces if it fails to secure a comprehensive restructuring agreement with creditors are very detrimental, including but not limited to prolonged litigation, asset seizures, and exclusion from international capital markets.

The risks Lebanon faces include litigation, asset seizures, and exclusion from international capital markets.

The case of MEA’s Airbus A320, which was grounded for eight days in October 2005 by Turkish authorities due to a dispute between the Lebanese state and a German company, highlights the tangible risks faced by state-owned commercial entities when legal claims arise against their sovereign owners. This precedent raises a critical question: If Lebanon’s creditors pursue enforcement actions, could MEA’s aircraft and other assets once again become targets in future legal disputes?

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Sources:

-        Casetext.com. (1994). Transaero, Inc. v. La Fuerza Aerea Boliviana, 30 F.3d 148 | Casetext Search + Citator. [online] Available at: https://casetext.com/case/transaero-inc-v-la-fuerza-aerea-boliviana-4.

-        Ministry Of Finance (2019). Ministry Of Finance. [online] Finance.gov.lb. Available at: https://finance.gov.lb/en-us/Pages/Pdf-Preview.aspx?dt=OL1275.

-        vilis (2023). Preliminary Estimate of Lebanese Banks’ Losses on Sovereign Eurobonds - BLOMINVEST. [online] BLOMINVEST. Available at: https://blog.blominvestbank.com/46627/preliminary-estimate-of-lebanese-banks-losses-on-sovereign-eurobonds/.

-        Abousleiman, C. (2024). Eurobonds: Time to negotiate with the holders. [online] L’Orient Today. Available at: https://today.lorientlejour.com/article/1371650/eurobonds-time-to-negotiate-with-the-holders.html.

-        L’Orient-Le Jour. (2005). Aviation La MEA gagne 500 000 dollars d’indemnisation pour un avion cloué au sol à Istanbul. [online] Available at: https://www.lorientlejour.com/article/517219/Aviation_La_MEA_gagne_500_000_dollars_d%2527indemnisation_pour_un_avion_cloue_au_sol_a_Istanbul.html.