Vulture Funds Circle Greece Targeting Europe’s Best Trading Bet

Vulture Investors Loom Over Greece

The vultures are circling over Athens.

Even with Greece running out of cash, talks deadlocked over releasing more aid and the government’s securities sliding in value, a handful of distressed-debt funds -- sometimes known as vulture investors -- see the chance for a big payday.

Investors including New York-based Perry Capital, Knighthead Capital Management and Monarch Alternative Capital LP are betting that the worst will be averted, according to three people familiar with the trades.

A resolution to the contentious negotiations between Greece and the creditor group that has lent it 240 billion euros ($271 billion) in the past five years could see Greek debt double in value, said the people, who asked not to be identified because the matter is private. Greece’s desire to remain a member of the European Union as well as EU leaders’ goal of keeping the bloc intact will yield an accord, they said.

“Greece, as an investment opportunity, has much more upside than anything else in Europe,” Hans Humes, founder of Greylock Capital Management LLC, an emerging-markets hedge fund that owns Greek debt, said in a telephone interview from New York. “One of the reasons it’s so attractive is everyone thinks it’s as mysterious and dangerous as being in Game of Thrones or something.”

Laura Torrado, general counsel at Knighthead, and Jeremy Fielding, a spokesman for Monarch at Kekst & Co., declined to comment; Michael Neus, general counsel at Perry, didn’t respond to an e-mail seeking comment.

Bonds Plummet

Greece, which has been held financially aloft by the EU for the last five years, is running out of time to reach an accord with its creditors, a group that includes the International Monetary Fund, the European Central Bank and the European Commission. They’re haggling over the terms of releasing a bailout tranche of about 7 billion euros, with Greece demanding easier terms.

Greece’s 1.7 billion euros of 3 percent notes due 2025 were quoted at 53.8 cents on the euro Wednesday to yield 11.6 percent. Those securities sank to about 12 cents in May 2012 and were quoted below 50 cents in April.

Striking a deal that extends Greece’s aid package will probably push bond prices to between 60 cents and 70 cents, said two of the people. And if the ECB decided to make the securities eligible to be purchased under its quantitative-easing program, which could only happen if Greece got its bailout back on track, the value of the notes would go to par.

“If Greece avoids a default and stays in the euro, buying Greek assets may prove to be the best contrarian trade this year,” Athanasios Vamvakidis, a Bank of America Merrill Lynch analyst, wrote last month in a note to clients.

Write Down

The dangers of purchasing such risky securities are implicit. In 2012, investors holding 95.7 percent of Greece’s privately owned bonds accepted a debt swap that forgave the country more than 100 billion euros.

Dozens of banks, insurers and investment firms accepted the swap, including Allianz SE, Axa SA, Deutsche Bank AG and Greece’s six largest banks.

Even if Greece ends up restructuring some of its 312.7 billion euros of debt again, bonds held by private investors will probably go unscathed, one of the people said. Restructuring private creditor debt after imposing losses in 2012 may discourage investors from participating in future restructurings -- something EU officials and the IMF want to avoid, the person said.

Private Holders

Institutional investors, emerging-market and credit hedge funds that decided to bet on Greece have been involved in the trade for over a month, according to two bankers not authorized to speak with the press. Less Greek debt is exchanging hands since most investors have already bought the securities and are managing the associated risks, said one of the bankers.

About 13 percent of Greek debt is in private hands that mainly hold securities issued in 2012 and 2014, according to Barclays Plc. Those bonds include provisions requiring that any modification to the securities be approved by two-thirds of bondholders, the bank said in a June 3 report.

Barclays estimates that a higher portion of these creditors are “specialist non-resident investors” -- such as distressed debt funds -- than in 2012.

“As time goes by there’s bigger risk of a ‘‘Grexident’’ happening,” Julian Adams, chief executive officer of emerging markets fund Adelante Asset Management Ltd., said in a telephone interview. “We’re coming to a point where there are red lines that are hardening from both sides and as the deposit flight intensifies they may have to impose capital controls. So the question is: what kind of tolerance do you have?”

Before it's here, it's on the Bloomberg Terminal.