LONDON (IFR) - Distressed debt funds are building up blocks of Greek government bonds with an eye to holding out against, and ultimately profiting from, a restructuring of Greece’s debt.
So-called “vulture funds” have had success in holding out against past sovereign restructurings, including those carried out by Argentina and Peru. Now, as negotiations have intensified in recent weeks over the private sector’s offer to restructure Greek debt voluntarily, some funds are once again preparing to cash in on a major sovereign debt exchange.
“There have definitely been some distressed funds expressing interest in buying significant portfolios of Greek bonds at a high discount. It seems for now there is not much trading, though, because the bid price is low compared with the price where sellers would be willing to get rid of their position,” said a head of rates trading at a European bank.
Funds thought to be active in scooping up GGBs include Elliot Associates - which successfully held out on Argentina’s and Peru’s sovereign restructurings - and Fir Tree Partners, which has become embroiled in a dispute over restructuring of Irish bank debt. Neither firm responded to requests for comment.
Market-makers said GGB trades that had gone through had often been executed in periods when the market became particularly distressed and prices dipped.
“I’ve seen a lot of buying in Greek bonds in the past few weeks. When stuff starts trading at 30 cents on the euro, people are looking to get involved. The market is very illiquid though, so it takes time to build up a large stake,” said a head of European rates at a major bank.
Traders declined to reveal exactly which series of GGBs were being targeted by potential hold-outs, but certain issues look likely to have been targeted. If a Greek restructuring followed the pattern of the recent restructuring of Irish bank debt and a coercive tender was put forward, 75 percent of holders of any particular series of bonds would need to accept the haircut in order to bind all holders to the agreement.
If an investor wanted to block a tender, it would therefore look to accumulate more than 25 percent of a given series of bonds, according to Steven Friel, a litigator with law firm Brown Rudnick, which specializes in representing funds in these types of cases and has been speaking to a number of parties interested in Greece.
It would also make sense for funds to target bonds governed by English law - a trend that some traders have observed. These tend to be the foreign-denominated bonds, which make up around 10 percent of Greece’s outstanding debt.
“If bonds are governed by Greek law, it’s going to be easier for Greek legislature to pass a law that simply amends the bonds, which would be much more difficult to do for English law-governed bonds,” said Friel.
English law-governed GGBs have been trading at a premium in the market for a while now as a result of this apparent advantage; for instance, a June 2013 US dollar-denominated GGB trades 15 cents on the euro higher than comparable tenors of domestic GGBs. Foreign-denominated bonds also tend to be smaller issues, potentially making it easier for funds to build a blocking stake in them.
“There’s been a view for a while now that English law bonds trade differently to Greek law bonds as they’d be judged upon in UK courts,” said another senior rates trader at a European bank.
There is potentially a wide pool of sellers of GGBs, and not only long-only investors such as asset managers. Following the original so-called PSI agreement in July, there was thought to be some pressure on European banks - which had to disclose their holdings to regulators - not to sell their Greek bonds.
One person close to the current PSI negotiations said the “battle lines are still being drawn” and noted questions remained over how prominent a role regulators would take this time round. The head of rates trading indicated banks may now be more tempted to sell their GGB holdings to avoid taking further potential mark-downs on Greek debt.
“To be honest, the pressure for banks to get rid of GGBs is very strong, because shareholders don’t exactly thank you for holding these positions,” he said.
In the meantime, distressed debt funds are not the only ones playing on the Greek situation, with many other traders looking to turn a profit out of it.
“I’m holding March 2012 GGBs and shorting banks, because if Greece defaults messily, then banks will struggle. It’s really a bet on how long this takes - if the PSI is not in place before March then the bonds could be paid in full,” said one hedge fund trader. (This story appears in the November 26 issues of the International Financing Review, a Thomson Reuters publication — www.ifre.com)