(Bloomberg) -- Lebanon’s defaulted dollar bonds have almost doubled in less than three months, and one trader who caught the surge from the beginning says they could double again after the overthrow of longtime Syrian dictator Bashar Al-Assad.
Soeren Moerch, a Copenhagen-based portfolio manager at Danske Bank AS, started to purchase the bonds in September and has held onto that position ever since on a bet that Israel’s attacks against Hezbollah would weaken the Iran-backed militia’s influence over Lebanese politics.
“I’m a happy holder,” Moerch said on Monday. “Syria falling as Hezbollah is weaker should be positive for Lebanon,” he added, while predicting that the rally could extend to 25 cents if Hezbollah is displaced or further weakened in Lebanese politics.
Moerch, who manages a $3 billion fund investing in emerging-market hard-currency debt as part of Danske’s total $120 billion under management, declined to provide details on the size of the Lebanon position.
Assad’s fall in Syria over the weekend whetted investors’ appetite for Lebanese securities again. At least nine of its dollar bonds ranging in maturity from 2026 to 2037 moved to trade above 12 cents on Monday, compared with an average of around 6.5 cents for most of the year. That makes them the best performers in emerging markets, though the securities remain in default, with little progress on restructuring or relief.
“The weaker Hezbollah is, the more likely its influence on the government wanes and the more market-friendly economic policy is,” said Hasnain Malik, an analyst at Tellimer. “At such distressed prices, investors in the bonds are more excited about that then the fiscal burden of reconstruction costs.”
Supply Routes
Hezbollah is designated a terrorist organization by the US and regularly engages in fighting with Israeli forces. It also has a political wing and has held seats in Lebanon’s parliament since the 1990s. Its militia is estimated to be as large as Lebanon’s national army and is supplied in large part by Iran via Syria, with that route now disrupted by Assad’s overthrow.
Since Lebanon stopped meeting international payment obligations in 2020, its gross domestic product has shrunk to a fraction of its former level, hyperinflation has pushed most of its citizens into poverty and its sources of foreign funding have dried up. Reforms necessary to end the spiral following a banking crisis and currency collapse haven’t even begun.
The country now faces a daunting post-conflict agenda to enact economic and political reforms that would allow money to start flowing in again. Yet Lebanon barely even has a functioning government, with a caretaker administration in power since 2022 and no president in place following several failed election attempts since then.
(Updates with more details on Danske in fourth paragraph.)
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