UPDATE 2-Grey market on Greece euro bond below 5%

Wed Apr 9, 2014 2:53pm EDT

(Updates latest grey market pricing)

By Helene Durand

LONDON, April 9 (IFR) - A five-year benchmark issue for Greece, its first international bond issue in four years, has attracted more than 11bn of interest from investors who are casting aside memories of a painful haircut they suffered on Greek bonds two years ago.

The sovereign set initial price thoughts at a 5%-5.25% yield on Wednesday afternoon for pricing tomorrow, but the deal is indicated by brokers at 4.85%-4.9% in the grey market.

"Investors are desperately searching for yield and it is very hard to find anything that pays more than 3%-4% in the current market," said a banker on the trade. "This deal is one of the few ways of getting yield in a liquid security."

When initial talk was first announced the yield on Greece's 2024 bond was around 6%, but it closed at 5.83%, according to Tradeweb. Meanwhile the gap between Greek and Portuguese 10-year bonds has contracted to 194bp from 220bp.

Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs International, HSBC, JP Morgan and Morgan Stanley are leading the trade. The 11bn shadow book includes 1.3bn of joint lead manager interest.

"No question there's massive upside in this deal. Greece should be trading 25bp wide of Portugal," said Hans Humes, New York-based CEO of Greylock Capital.

"It's priced to be a blowout as a vote of confidence in Greece."

US books will close at the end of day on Wednesday but official guidance is only expected to be set at the London open Thursday morning. US investors will be able to amend orders post guidance in the morning session.

The last time Greece sold a bond in the capital markets was in early 2010, when it issued a five-year at 310bp over mid-swaps. Since then, there are have been two bailout programmes worth 245bn, and investors have had to take painful haircuts on their debt holdings.

"Investors are looking at this on a relative value basis and you can't let history get in the way," the banker said.

"No investor has mentioned the Private Sector Involvement (PSI) in an emotive way to us. There are many ways to lose money on bonds, either through restructurings or because you have sold at the lows, and a debt haircut is not a firm barrier to a bond market re-entry."

Last month, Greek lender Piraeus Bank sold its first bond in over four years. The 5% 500m March 2017 bond offered investors a yield of 5.125%, or mid-swaps plus 452bp. It is currently trading around 350bp over mid-swaps, or a 4.125% yield. A five-year bond from the sovereign targeting a yield of around 5% would mean a pricing level of 400bp over mid-swaps.

Moody's rates Greece nine notches below investment grade at Caa3, while Standard and Poor's and Fitch put it six notches below investment grade at B-. (Reporting by Helene Durand; Additional reporting by Sarka Halas, Alex Chambers, Mike Gambale; Editing by Sudip Roy, Philip Wright, Shankar Ramakrishnan)

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