A tale of two debt restructurings

Venezuela: hawks versus doves

I was in Caracas not long before the 2024 general election. Back then, it was widely described as the regime’s “last chance saloon”.

One year on, and President Maduro has tightened his grip on power. In Washington, the US administration is split into two camps: doves, led by Special Envoy Richard Grenell, and hawks, led by Secretary of State Marco Rubio.

The tug-of-war has largely played out through Chevron, the US oil major. Its operating license was revoked, then reinstated. Under the current terms, the Maduro administration won’t receive royalties or taxes directly – payments will be made in kind, via crude oil or diluents.

Before the 2024 US election, the idea of debt restructuring talks with Maduro was almost unthinkable. It’s now a possibility, though not a foregone conclusion. The fundamental question remains: how far is the Trump administration willing to go to advance democracy in Venezuela? So far, there’s no clear answer.

We’ve built a recovery model for Venezuela. It assumes a small initial coupon – similar to Ecuador’s post-default restructure in 2020 – and a fragile economic backdrop with limited debt-servicing capacity. Venezuela is home to the world’s largest oil reserves, and any restructuring deal will likely include an oil warrant for commercial bondholders.

Higher coupons or revenue-sharing will depend on Venezuela’s ability to ramp up oil production. This will take time. The sector needs significant capital expenditure, and there’s no clear timeline for returning to its previous peak of three million barrels per day (bpd). Even a 50% increase in production from the current one million bpd would unlock much-needed foreign capital.

Over the past six years, much of Venezuela’s oil sold to China has traded at a 20% discount compared with the Organisation of the Petroleum Exporting Countries' (OPEC) basket price (see chart 1 below). A return to the international fold could see prices normalise, reshaping the country’s fiscal outlook. 

Venezuela hasn’t released much economic data since the 2017 default, making forecasting difficult. Using our analysis and International Monetary Fund (IMF) data, we estimate that a nominal haircut of at least 50% would be needed to bring the debt-to-gross domestic product ratio down to 80%.

However, the IMF will likely focus more on debt-to-revenue and debt service-to-revenue ratios when assessing sustainability. That means oil production and prices will be crucial in determining the size of the haircut and coupon on any new debt.

One unresolved issue is whether PDVSA, Venezuela’s state oil company, would be treated on par with the sovereign in any restructuring. PDVSA is Venezuela’s alter ego – and we expect its debt and past-due interest to be treated pari passu with the sovereign. The US Court of Appeals supports this view.

Our positioning

We’re overweight Venezuela, with exposure split almost evenly between sovereign and PDVSA bonds. Despite severely distressed prices, Venezuela is among the top performing emerging market (EM) bonds this year (see chart). If a Eurobond restructuring goes ahead – and includes an oil warrant – the recovery value could land in the 30-45 cents range.  

Lebanon: hope from the rubble?

From civil wars to near economic collapse to port blasts – Lebanon is no stranger to crises. Its debt, including accrued interest, is estimated at over US$40 billion (see chart 3 below for the net foreign-exchange position).

Four major obstacles stand in the way of debt-restructuring: bank secrecy laws, bank resolution frameworks, disarmament of non state actors and Eurobond negotiations. Encouragingly, there’s growing urgency among policymakers to address these issues. 

 The recent war with Israel caused an estimated US$14 billion of damage, once again pushing the country close to the brink. But there’s a silver lining. The blow to Hezbollah’s military capabilities could shift the political balance – potentially creating space for reform and a path to financial stability.  

Lebanon: three challenges

Bank secrecy law

After five years and numerous failed attempts, Lebanon’s parliament has finally passed a bank secrecy law that satisfies the IMF. The legislation, which previously protected customer names and deposit amounts, had long been a sticking point in bailout negotiations. That hurdle has been cleared.

Bank resolution law

Lebanon passed a bank resolution law in April 2025, but the IMF rejected it. The law outlines how authorities should deal with defaulting banks but it can’t be implemented until a separate ‘financial gap’ bill is approved. That bill, still pending, will determine how losses are split between banks and the state.

Opinions on the outcome vary. The central bank governor wants depositors – especially those with more than US$100,000 – prioritised over creditors, including Eurobond holders like us.

Timing is critical. It took five years to pass a bank secrecy law. Will the financial gap bill take as long? We think not. President Joseph Auon and Prime Minister Nawaf Salem are reform-minded and politically independent. Lebanon also faces urgent reconstruction needs, limited fiscal space, and no real capacity to borrow, all of which demand swift resolution.

But obstacles remain. A powerful lobby of politicians with close ties to the banking sector – and influence over the media – continues to block progress.

Hezbollah – weakened but still entrenched

The most complex issue is Hezbollah. The Iran-backed militia group has been weakened by the 2024 conflict with Israel and the collapse of its supply route through Syria following the fall of Assad. But Hezbollah remains a political force. The Lebanese constitution mandates that the speaker of the parliament is a Shia Muslim. Hezbollah dominates this role.

All that could change. I spent time in Lebanon during the war in 2024 and again in January this year. One journalist recently described Hezbollah as “a car crash at the side of the road: completely beaten, yet the radio continues to play.” It’s an apt description of the group’s current position – lots of noise but not much leverage.

Eurobond debt restructuring

We’re a member of the Steering Committee, which has met regularly over the past three months. Progress, however, has stalled due to limited government engagement and delays in passing key reforms. The ‘financial gap’ bill — a prerequisite for IMF support — remains the critical next step. Once passed, we expect negotiations to gain momentum.

Our positioning

Unlike Venezuela, Lebanon doesn’t have natural resources, which means the eventual recovery values of its bonds are likely to be lower. We initiated a similarly sized position across our funds earlier this year, following the fragile ceasefire agreement with Israel in late 2024.

Our initial recovery estimate was 25 cents. But the prospects of a larger economy and the modest cost-to-bank deposits could boost the recovery value into the low-to-mid-30s compared with current levels of 23 cents.