Peter Tchir

Greek Creditors Don’t Get the Courtesy of a Reach-Around

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Only in Greece, can you wipe out €100 billion of debt, and have the new debt that replaces it trade at 20% of face value.

So 85.8% of Greek law bonds “participated”. The government intends to use the Collective Action Clause to force the holdouts to participate. It is unclear if the government has actually used the clause already, or just intends to. Once they use the CAC, that will be a Credit Event for the CDS.

English law bonds saw participation less than 70%. The deadline has been extended until March 23rd. As discussed all along, the English Law bonds gave some protection to holders and that clearly gave them the confidence to hold out. Given the Event of Default covenants, and the right to accelerate, some bondholders may push to accelerate after the Greek law bonds get CAC’d.

The market now knows that the PSI will be “successful” and a massive amount of debt will be wiped out, but the new bonds are being quoted “when and if issued” at prices ranging from the high teens to mid twenties. Why are the new bonds so weak? SUBORDINATION!

These new bonds may show up as senior unsecured obligations of Greece, but they are incredibly subordinated. Bondholders just gave up claims on 50% of their debt. While the EFSF may (or may not) have the same terms with Greece in their role as co-financer, the rest of the Troika debt is senior. On March 20th, the ECB and other “protected” entities, are due to receive €4,352,195,000. Yes, they are releasing some money to Greece, but mostly so it can pay the protected holders their money on March 20th. Protected entities hold over 30% of that issue and expect to get paid par. Real world people can get t-shirts, my central bank got par, and all I got are these EFSF notes and some real low coupon subordinated debt. It looks like the package is worth about 22 points, which shows how efficient the market is, since that is where bonds have been trading for awhile.

The GDP notes could be interesting depending on how they pay out. Any economy that can drop 7.5% in a quarter is likely to have a couple dead cat bounces off a low base. So long as there is no “high water” mark on the GDP notes they might trade like free options on any good quarter, though I expect we will have seen another restructuring before too long as the debt isn’t sustainable, and more and more is held by “protected class” lenders.

For the CDS, once a Credit Event is declared (which it will be) the market might get concerned about the large Gross amount outstanding – it shouldn’t.

More important is going to be the realization that Portugal and Ireland may want similar deals, and why not give them the deals, since the EU now knows they can make banks do whatever they tell them.

Spain is likely to be its own special case and seems to be just waiting for a catalyst to move wider again. Italy feels far more stable.

The next round of weakness is when bondholders will have to be aware of just how subordinated they are. Any bonds held by the ECB directly have to be treated as senior to regular bonds. Any bonds held as collateral for various lending programs will add to pressure as the ECB will have to make margin calls (I don’t think even Draghi can change that requirement easily).

Copyright © 2012 · Peter Tchir

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