EXCLUSIVE-Hedge funds find loophole to trigger Greek default

LONDON Fri Mar 9, 2012 4:55am EST

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LONDON (Reuters) - Some hedge funds have found a legal loophole they believe will force Greece to repay some of its debt in full, three sources close to the matter said on Thursday, in a move that would intensify the standoff between the country and its debtors.

Greece closed a bond swap offer to private creditors on Thursday after clearing the minimum threshold of acceptance to push the biggest sovereign debt restructuring in history.

Government officials said more than 75 percent of eligible bonds had already been committed resulting in losses of some 74 percent on the value of the debt in a deal that will cut more than 100 billion euros (84 billion pounds) from Greece's crippling public debt.

But because of a provision written into one particular bond, some hedge funds believe that Athens has already defaulted on that bond by asking bondholders to exchange their debt for new paper with a much lower value, according to the sources.

The funds are now trying to buy up enough of the bond -- issued by state-owned Hellenic Railways and guaranteed by the government -- to force Greece to repay them in full, to the tune of some 400 million euros.

If Greece refuses to do so, this may trigger similar provisions on other Greek railway bonds, potentially landing Athens with a bill of about 3 billion euros, with investors demanding immediate repayment, the sources said.

However, it is unlikely the hedge funds could derail the overall debt swap, which will shave more than 100 billion euros off Greece's debt pile, a crucial precondition for receiving more international aid and staying in the euro.

The exchange has already been accepted by more than 75 percent of investors, a senior official told Reuters ahead of Thursday's 8 p.m. deadline.

The hedge funds have been targeting some of Greece's more investor-friendly foreign law bonds -- like the railway bond -- hoping to stop Athens from activating so-called Collective Action Clauses (CACs), used to impose losses on all holders.

This could then allow them to squeeze a bigger payout, potentially through lengthy court challenges, while creditors that do sign up to the bond swap face losses of 74 percent on their investments.

ACCELERATING PAYMENTS

Athens has already warned that it does not have the money to pay these so-called "holdouts", but sources close to its negotiations are now concerned it may well have to pay out some smaller bonds in full to make the problem go away.

"What really infuriates me is that some of them (hedge funds) might manage to get paid in the end, on small amounts it's still possible," said one of the sources.

Some 15 pe rcent of Greece's 206 billion euros of bonds held by private sector investors are issued under foreign law.

The problematic transport bond - a 412.5 million euro issue maturing in 2013 - has a clause that allows bondholders to argue that Greece is in default if it is trying to restructure or change the terms of its debt, the sources said.

The creditors could already argue that Athens has defaulted, and if they buy up a quarter of that bond -- or enough of it not to be forced into the debt swap -- they can also then demand immediate repayment, a process known as acceleration.

Sources close to Greece's negotiation fear the funds could already start the acceleration process by Friday, or next week, if they find they have a big enough majority.

Final meetings concerning the swap of foreign law bonds take place at the end of March.

Although these clauses only concern this one bond, the action by hedge funds could trigger clauses contained in other Greek railway bonds.

And because of the provisions in other bonds governed by English law, this could eventually affect more deals, potentially affecting up to 8-9 billion euros worth of debt, one of the sources said.

(Additional reporting by Sophie Sassard, Editing by Douwe Miedema)

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