LONDON Dec 4 Hedge funds are preparing to
resist Greece's attempt to cut its debt by holding out against a
government bond buyback in the hope of bigger gains further down
Greece had to offer a higher price than expected at a 10
billion euro ($13 billion) buyback on Monday after hedge funds
buying bonds pushed prices higher.
Resisting the urge to bank a quick profit, hedge funds will
rely on the fact many bondholders will tender their holdings in
the buyback. That will leave Greece with less debt, underpinning
the value of what remains.
Some managers are now convinced that international lenders
will do whatever it takes to keep Greece in the euro, improving
the chances of payouts to bondholders.
Hans Humes, chief investment officer of New York-based
Greylock Capital, said he planned to hold onto shorter-dated
bonds, tender his long-dated Greek bonds in the buyback and then
buy more shorter-dated debt, keeping the size of his positions
in the country's debt about the same.
"Where else are you going to get such a great yield in the
short end?" he said. "There is nothing else as good as this from
a risk-reward perspective in Europe right now.
"They are well on their way to managing the (economic)
situation. After this transaction, I think Greece is going to
have a lot more people looking at (buying) their bonds."
Others said the buyback had put a floor under the price and
limited the downside while still offering potential future
"We may tender at the higher end of the range but have not
decided yet," said Julian Adams, CEO at Adelante Asset
Management. "(There) does not seem to be much downside in not
Hedge fund holdouts are unlikely to prevent the buyback from
getting over the line, according to Nomura analysis, because of
participation from banks. Hedge funds were estimated to hold up
to 25 billion euros out of the total 63 billion in private
Funds are wary of disclosing whether or not they will accept
the buyback for fear of weakening their positions. Many will be
hoping others will take up the offer, increasing the potential
payout for themselves.
Those that do hold out may take comfort from Greece's
about-face in May when it paid in full the holders of one bond
who rejected debt exchange in February. The government had said
at the time of the offer in March that anyone who rejected it
would get nothing.
Funds will also be buoyed by legal safeguards they now enjoy
as bondholders. Under Greece's 206 billion euro restructuring in
March, old Greek law bonds were traded in for new bonds issued
under English law, which offers investors more protections.
Managers are also getting excited about court rulings in the
long-running legal battle between Argentina and holdout
creditors, including U.S. hedge fund Elliott Management, which
have said Argentina must pay holders of restructured bonds and
"I think you will look back in two or three years' time on
this crisis and the Argentine U.S. court decision will prove to
be a very, very interesting juncture," said Lee Robinson,
founder of Altana Wealth. "It potentially affects many countries
and trillions of dollars of bonds (if they default)."
Robinson, who bought Greek bonds due 2042 at 20 percent of
face value, would not say whether he will take part in the
buyback. The Monaco-based manager said: "All the English law
bonds have been paid at par so far. It is very difficult to
bully bondholders under English law."
Greece has not specified the value of bonds it hopes to buy
back, but if it spends the full 10 billion euros at an average
price of 34 percent it can buy 28 billion euros worth, Nomura
economist Dimitris Drakopoulos said in a note.
With Greek, Cypriot and EU state banks almost certain to
tender close to 20 billion euros of their holdings, getting
hedge funds to tender another 8 billion at the higher prices
"seems a reasonable and likely outcome", Drakopoulos said.
Many of the hedge funds built up positions when Greek bonds
were as low as 11 cents on the euro after the national election
in June when the country looked close to exiting the euro.
Those worries have since receded, sparking a rally in the
bonds and netting funds who got in early a 200 percent gain
should they participate in the buyback.
Funds refusing to participate in the buyback are betting
that the smaller amount of private debt left over will rise in
price and they are less likely to face future losses.
After the buyback, around four-fifths of the country's debt
will be held by the official sector, and Greece will have the
longest duration bonds globally at very low interest rates,
reducing refinancing risks, one hedge fund manager said.
"One could say that as the PSI (private sector involvement)
halves, the small group left standing could be paid out on
better terms," Sohail Malik, head of special situations at asset
manager ECM said.
"But the worst case is that because the PSI is so small,
policymakers decide to haircut you completely and tell you that
'20 cents is your offer, take it or leave it' because you are
not a significant holder."