UPDATE 1-Greek buyback looks destined to succeed

Fri Nov 30, 2012 11:42am EST

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By Alex Chambers and Christopher Spink

LONDON, Nov 30 (IFR) - Greece's bond buyback, expected to be unveiled on Monday, has a high chance of success given the large proportion of state-connected holders and the chance of a profitable exit for hedge funds that bought at low levels over the summer.

Greece is targeting up to EUR68bn of bonds by face value as it seeks to cut its total debt by at least EUR20bn before December 13. It is required to do so in order to secure continuing support from the International Monetary Fund and so allow the disbursement of the latest EUR34bn tranche of loans under the country's bailout programme.

The vast proportion of that money, about EUR24bn, is earmarked for Greece's beleaguered banks, which remain the largest private-sector holders of Greek government bonds. Those banks are likely to feel that they have little choice in accepting the offer, as to decline would only delay their own recapitalisation. Some may even make a profit (at least in accounting terms) as the bonds are believed to be held at less than 25% of par in some of the banks' books.

Around EUR62bn of the bonds in Greece's sights were issued via March's private sector involvement (PSI) debt swap exercise and many of the holders are state-related institutions across Europe. They may be pressured by their governments to agree to the buybacks.

Cypriot banks, whose government is currently in talks with the eurozone about its own bailout, have large holdings of Greek bonds. So do Dexia, rescued by France and Belgium, and FMS Wertmanagement, the German state work-out vehicle for Hypo Real Estate.

Roughly EUR20bn of PSI bonds are in the hands of these Greek and Cypriot banks or other eurozone state-connected institutions.

GOING DUTCH

The buyback's dealers, Deutsche Bank and Morgan Stanley, will use a Dutch auction to create competitive price pressure. The buyback starts on Monday next week.

Eurozone leaders announced this week that the prices paid on purchases would not be greater than those prevailing at the close of business on November 23 - mostly less than 35 cents on the euro.

The European Financial Stability Facility is expected to lend Greece EUR10bn to pay for the buybacks, meaning (if it pays 30-35 cents on the euro) it will be able to repurchase about EUR30bn of bonds - cutting its debt by the required EUR20bn in the process.

However, given that only half of the outstanding stock of debt needs to be repurchased for the exercise to be deemed a success, Greece may get away with paying much less than that range.

STRONG TAKE-UP?

There has been significant trading in the new Greek bonds since the EUR206bn PSI debt restructuring, under which bondholders received notes from the EFSF, worth 15% of their old par value, and 31.5% of new Greek bonds maturing over 20 years from 2023.

Prices on the restructured debt - the 2% 2023 is the most traded bond - have also risen sharply from 11 cents on the euro in July to just under 35 cents this week. Hedge funds started buying when the odds of a Greek default fell and the odds of a buyback rose, and they may feel now is the time to cash in their winnings.

"This is probably the last opportunity for a meaningful liquidity event for investors for a long time," said a banker.

Bondholders may also feel that it is better to exit at a profit now, rather than risk being caught up in another forced restructuring down the road.

One large French institution said that it had sold the very liquid EFSF notes and also divested the strip of Greek bonds picked up after March's debt swap.

No restructuring of the official sector debt is currently on the table, beyond extending these loans' maturity and reducing their interest rate. But a nominal haircut at the Paris Club is seen as likely at some point, and this might precede further private-sector cuts.

"Par is clearly unachievable as there obviously has to be another write-down for Greece to be sustainable. Fair value is therefore pretty hard to calculate," said one hedge fund manager, who held Greek-law bonds bailed into the PSI.

"We might easily be sellers simply in order to tidy up our portfolios. Fifteen lines of Greek bonds is a bit distracting," he said.

A spokesman at FMS confirmed that the institution retained Greek bonds with a nominal value of EUR2.6bn, but declined to say whether it would accept the buyback.

"We would not disclose our strategy in advance," he said.

The 16 foreign-law bonds with a face value of EUR6.4bn on which Greece was unable to enforce a retroactive collective action clause, and that were therefore not included in March's exchange, may also be eligible for the buyback. Several mature over the next few years and trade nearer par. (Reporting by Alex Chambers; editing by Matthew Davies)

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