Monday, December 3, 2012

Greece begins the buyback process

Greek government debt yields hit another post-restructuring low (14.9%), as the government offered a better than expected price for the bonds. These bonds are now quite popular in the European markets - it's not every day that one gets a buyback from a sovereign. The minimum price offered in the buyback program is 30 cents on the euro (on the longest maturity, most discounted bonds).

Greece long-term gov yield (source: Bloomberg)

This steep discount is necessary in order reduce the amount of debt outstanding. It looks as though the bonds will trade in the 32-34 range. Greece expects to spend about €10bn of borrowed money in order to reduce the outstanding debt level by roughly €20bn (30bn of face costing 10bn).
NYTimes: - While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 euro cents and a maximum of 40 cents, for a discount of 60 percent to 70 percent.

Analysts said they expected that the average price would ultimately be 32 to 34 euro cents, a premium of about 4 cents above where the bonds traded at the end of last week.
The buyback will be conducted using a "modified Dutch" auction.
Reuters: - The buyback will be conducted through a modified Dutch auction in which investors declare what level they are willing to sell their bonds at before Athens sets a final price.

Such an auction creates competition among investors since anyone bidding at the upper end of the range risks being left out, and allows Athens to assess demand before setting a price.

The range set by Athens varied from a minimum of 30.2 to 38.1 percent and a maximum of 32.2 to 40.1 percent of the principal amount, depending on the bond maturities of the 20 series of outstanding bonds.
Apparently Greek banks are "highly encouraged" to participate in order to assure the success of this exercise. It's not clear if foreign holders plan to participate as well. That's because in a post-buyback world the holders may think they own better quality paper - lower default risk due to lower bond principal and low rate on the total debt package (see discussion). They may believe the bonds are worth more than the Dutch auction maximums (for example in case Greece does another buyback later at a higher price). This of course introduces additional risk to the auction.
Reuters: - Despite the better than-expected terms, some analysts said it remained to be seen whether the buyback would be successful. Greek banks - which hold about 17 billion euros of eligible bonds - are under pressure from Athens to participate, but there is skepticism over how many foreign investors will do so.

"This is just another milepost on Greece's road to Hell, which is of course, paved with good intentions," said Stuart Thomson, manager of the Ignis Strategic Bond fund.

"The success of this buyback depends on the hedge funds and very much on their calculation whether a holdout could eventually get them more, or whether they will face a haircut in the next round."

RBS strategists said they expected the buyback to be a success given many funds would book a profit after picking up the bonds in the range of 15-20 cents on the euro.
We should know the results shortly.
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