Greek Bond Buyback Hostage to Below-Market Prices: Euro Credit
Greek efforts to ease indebtedness by repurchasing its own bonds at less than their face value depend on investors accepting below-market prices rather than holding out for an improved offer.
Greece may tender for bonds issued in its 100 billion-euro ($130 billion) restructuring this year at prices “expected to be no higher than those at the close” on Nov. 23, euro area finance ministers said yesterday. Those notes trade at about 29.5 cents on the euro, up from 28.1 percent last week, according to brokerage Exotix Ltd. in London.
“Non-domestic investors are probably expecting that they can achieve a better price in the future,” said Craig Veysey, head of fixed income at Sanlam Private Investments Ltd. in London, a unit of Sanlam Group, which oversees $72 billion. “A new deal on better terms, perhaps. Or the market price may increase, too, over coming years.”
Greece’s rescuers are trying to keep the 17-nation currency union intact by easing conditions on bailout loans and giving Europe’s most-indebted nation more time to repay. The International Monetary Fund, along with the European Central Bank and the European Commission, makes up the troika that is implementing the bailout. The group has indicated it will insist on a buyback as one of the conditions for the release of the next installment of its cash.
The more acceptances Greece wins, the greater the incentive for some holders to refuse to take part in the hope their holdings are small enough to get repaid in full at maturity. In May, for example, owners of a floating-rate note sold in 2002 who declined this year’s restructuring, got repaid. Conversely, defaulting on non-domestic lenders becomes a less risky option for the nation provided its banks participate in the offer.
Finance ministers plan to meet again by Dec. 13 to review progress and make a formal decision on Greece’s 34.4 billion- euro disbursement. In their statement, the ministers included no details of how the buyback would be implemented, how it would be funded, or specifics about the size and what would count as success.
“The details are still sketchy,” said Gizem Kara, an economist at BNP Paribas SA in London. “They probably didn’t want to say anything because going into too much detail might distort prices. It has to work, though, because the math of the debt reduction targets assumes there’s a successful buyback.”
The new bonds have collective action clauses, which in a second restructuring would allow a preset majority -- typically at least 66 percent -- to force holdouts to take part, according to Gabriel Sterne, an economist at Exotix Ltd. in London. Still, enforcing the CACs risks triggering credit-default swaps and being put into default by the ratings firms to deal with a rump of bondholders, he said.
“Would it be worth the fight with the hedge funds?” he said. “I just don’t think they would want to go there yet again.”
Greece has about 60 billion euros of restructured bonds outstanding, handed to investors taking part in the debt exchange. The notes, issued in 20 maturities ranging from 2023 to 2042, typically trade as a block called the strip at an average price across all the maturities.
The bonds are held about a third each by Greek banks, other Greek funds and non-domestic investors, primarily hedge funds, German Deputy Finance Minister Thomas Steffen said yesterday.
Greek bonds have gained, with the 2023 note rising to 35.21 percent of face value from 34.36 percent on Nov. 23, data compiled by Bloomberg show. The 2042 notes advanced to 27.41 percent from 25.4 percent in the period.
IMF Managing Director Christine Lagarde, speaking after the finance ministers’ meeting, said she wanted to see progress “on specifying and delivering on the commitments made today, in particular implementation of the debt buybacks,” before any funds are disbursed. The IMF has pledged 1.6 billion euros per quarter to Greece, a sum that is more important as a seal of approval than for bolstering Greek finances, according to Kara at BNP Paribas.
Greece may get a 10 billion-euro loan, most probably from the region’s new bailout fund, to buy back 30 billion euros of bonds and thereby cut its debts by 20 billion euros, Kara said. A buyback of privately held debt also would protect Greece’s creditor nations from having to write down the value of their holdings.
“We’re relatively confident that it can work,” German Finance Minister Wolfgang Schaeuble said yesterday at a press conference in Berlin. If the buyback fails, “the troika will have to take other measures and tackle the issue in another way,” he said.
For the repurchase to succeed, Greece will have to offer a higher price than the 24 cents that the strip traded at on Nov. 5, before speculation about a buyback gained credibility, said Sterne at Exotix. Greece will have to balance that against the risk of overpaying, he said.
“If the buyback price is forced up too high, it will be unpalatable to Greece and the European authorities, and the buyback will fail,” Sterne said. “The incentive not to participate is likely to be strong. The average value of the bonds for those that do not participate could rise sharply if there is very high participation.”
Sterne, a former IMF official, estimates that the strip might go as high as 50 cents on the euro assuming there is broad participation, compared with 24 cents if the buyback fails.
Bondholders probably will call the finance ministers’ bluff, said Peter Tchir, the founder of New York-based TF Market Advisors.
“Now that the Eurogroup has made a condition out of the bond repurchase, it is almost the obligation of the bondholders to hold their feet to the fire,” he said. “I can’t see bondholders accepting last week’s prices without trying for more.”
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