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Lebanon’s defaulted dollar bonds have surged in price more than 25 per cent so far this year over bets that recent nationwide protests in Iran could reduce the Islamic republic’s influence in the region.
Lebanese debts with a face value of $30bn have risen from 23 to 29 cents on the dollar this month — the highest level since its 2020 default amid an economic crisis — on optimism that Beirut is now fixing its finances and that Iran-backed groups across the region, such as Hizbollah in Lebanon, will be weakened.
International investors have been hunting for defaulted sovereign debt trading at knockdown prices, which they hope could surge in value just as Venezuela’s bonds did this month following the US capture of President Nicolás Maduro.
“Lebanon is probably trading well because of the Iranian situation . . . Money dries up for Hizbollah” if the regime is weakened further, said one fund manager who is a specialist in distressed sovereign bonds and who is monitoring the situation.
Human rights groups outside Iran estimate that thousands have been killed in the protests — the biggest anti-regime unrest since the 1979 Islamic revolution — which appeared to have subsided in the face of a fierce state crackdown.
Lebanon’s bonds had already been rallying over signs of the waning political influence of militant group Hizbollah, which has previously opposed an IMF-led debt restructuring. The group has long been one of the country’s most powerful military and political forces but has suffered a series of severe blows over the past 18 months. For instance, the bonds tripled in price from 6 cents on the dollar after Israel’s September 2024 assassination of Hizbollah leader Hassan Nasrallah.
The US’s dramatic capture of Maduro this month has driven a sharp rally in the South American country’s bonds over hopes of a restructuring, and investors are now fearful of missing out on similar rallies in other bonds previously seen as near-worthless.
“The unexpected 30 per cent rally in Venezuela [bonds] has shown [institutional investors] that being underweight can be dangerous,” said a hedge fund manager.
“They are busy reducing those underweights [against the index] in many esoteric names, Lebanon being the most obvious,” the manager added.
While Lebanon remains a long way from securing an IMF-backed debt restructuring, the bonds have also rallied due to progress being made on a so-called gap law to sort out tens of billions of dollars of losses on deposits from a 2019 financial crisis and banking sector collapse. While at an early stage and still needing to be passed by parliament, the proposals have given bondholders more clarity on how much might be left over for them after depositors are paid.
Recent cabinet approval of a draft law “is the most tangible element of the rally but it’s hard to distinguish it fully from concurrent developments in Iran”, said Roger Mark, an emerging markets fixed-income analyst at Ninety One.
“A weaker Hizbollah in theory should make political decision-making easier and reduce Iranian influence on Lebanese [government] decision-making,” he added.
Analysts have previously estimated that bondholders would recover only about 25 cents on the dollar in any Lebanese debt restructuring given the costs of sorting out the banking system. But investors have been encouraged by the boost to Lebanon’s reserves from the surge in the price of gold over the past year and an improving economic outlook.
Hedge fund managers stress that bets on Iran through Lebanese government bonds are highly uncertain, citing the difficulty of dislodging the regime and pointing out that while proxies across the region could be weakened, they are likely to remain in place.
“As we’ve seen with Venezuela, sanctions being lifted is usually slow because the US wants to see policy they like enforced first,” said the hedge fund manager.
The protests in Iran, and the possibility of changes to the regime, have also prompted international investors to look at whether they might at some point be able to re-enter the country’s domestic stock market, where sanctions have kept almost all foreigners away in recent years.
Maciej Wojtal, chief investment officer of Amtelon Capital, an Amsterdam-based manager that holds a rare foreign institutional investor licence to trade Iranian stocks, said he was fielding a surge in calls from investors based in Europe and elsewhere.
“The last few days, I’ve been 15 hours a day just communicating with investors . . . this shows there is a lot of people waiting for some sort of catalyst, just to be ready to invest as quickly as they can,” Wojtal said. Amtelon cannot engage with US investors due to Washington’s sanctions.
Despite rising sharply in nominal terms, Iran’s Tedpix benchmark index stands at less than one-third of its all-time high reached in 2020, when measured in dollars using the unofficial so-called “bazaar” exchange rate, which is much weaker than the rial’s official value.
Steps towards the normalisation of Iran’s economy and the removal of sanctions would boost the market by opening up exports and access to foreign currency to relieve the rial’s plunge, Wojtal said.
“Sanctions impact the whole macroeconomic structure, including exports, which impacts hard currency reserves. The more hard currency reserves come in, the stronger the local currency,” he said.
Additional reporting by Raya Jalabi