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Tuesday, 4 December 2012
Hedge Funds Win as Europe Will Pay More for Greek Bonds
By Jesse Westbrook & Chris Larson - Dec 4, 2012 11:49 AM GMT+0400
Hedge funds invested in Greek debt are poised to be winners after European policy makers flinched and raised the price for how much the recession-stricken country would pay to buy back its bonds.
Hedge funds drove up prices for Greek sovereign debt last week after determining that European finance ministers would back off a pledge to pay no more than about 28 percent of face value to retire the nation’s bonds. Money managers correctly wagered that not enough bondholders would participate at that level to get the deal done. That would put at risk bailout funds that Greece needs to stave off economic collapse.
A protestor waves a Greek national flag outside the Greek parliament building in Syntagma square during a public protest against a visit by Angela Merkel, Germany's chancellor, her first in five years, to Athens, Greece, on Tuesday, Oct. 9, 2012. Photographer: Eirini Vourloumis/Bloomberg
European finance ministers approved the plan to buy back bonds last week as part of a package of measures to cut Greece’s debt to 124 percent of gross domestic product in 2020 from a projected 190 percent in 2014. Photographer: Kostas Tsironis/Bloomberg
“The whole saga has been a textbook case of how not to do this sort of thing,” said Adelante Asset Management Ltd. Chief Investment Officer Julian Adams, whose London-based firm holds Greek bonds. “The official sector continues to demonstrate its total misunderstanding of how markets operate.”
Euro-area finance ministers meeting last night in Brussels expressed confidence that Greece will pull off the transaction. The country said yesterday it would put 10 billion euros ($13.1 billion) toward repurchasing outstanding bonds with a face value of 62 billion euros. The country and its European backers agreed to pay prices ranging from an average minimum of 32.1 percent of face value to as much as 34.1 percent in an auction that will run until Dec. 7, according to a statement.
“I’m confident it will go well,” French Finance Minister Pierre Moscovici told reporters yesterday. “It seems to be happening under satisfactory conditions.”
The buyback was approved by the euro finance chiefs last week as the linchpin of a debt-reduction scheme after Germany rejected the writeoff of official loans as a way of easing the Greece’s financial plight. The aim was to cut its debt to 124 percent of gross domestic product in 2020 from a projected 190 percent in 2014. At the time, officials said they expected to pay no more for the bonds than the closing price on Nov. 23.
A market rally made it difficult to stick to that pledge. Greek bonds rose for a third day yesterday, pushing the 10-year yield below 15 percent for the first time since the nation’s debt was restructured in March. The price has more than doubled since a post-restructuring low of 13.3 percent on May 31.
Some hedge funds began buying Greek bonds after the March debt swap, concluding that prices and yields reflected an erroneous market view that the country was headed to default. Traders at firms including Dan Loeb’s Third Point LLC determined that other investors were too concerned about the risk of Greece dropping the euro, especially after European Central Bank President Mario Draghi’s July 26 pledge to protect the currency bloc.
Hedge funds that joined Third Point in investing in Greek debt include Louis Bacon’s Moore Capital Management LLC, David Tepper’s Appaloosa Management LP and Jeffrey Tannenbaum’s Fir Tree Partners Inc., according to two people with knowledge of the matter who asked not to be identified because the firms are private. Tepper didn’t return a phone call and spokesmen for the other funds declined to comment on the buyback.
Transactions involving Greek bonds have “increased by the day” since it became clear that the buyback was going to happen, said Zoeb Sachee, the London-based head of European government bond trading at Citigroup Inc. Hedge funds have accounted for most of the recent purchases, he said.
“If all goes according to plan, everybody wins,” Sachee said. “Hedge funds must have bought lower than here. If it isn’t successful, Greece risks default and everybody loses.”
The buyback will be done through a so-called Dutch auction in which investors will be able to specify the price, within a set range, at which they are willing to sell the securities. The intention is to retire the bonds issued when Greece restructured its privately held debt nine months ago.
Hedge funds hold Greek bonds valued at as much as 22 billion euros, according to Nomura Holdings Inc. economist Dimitris Drakopoulos.
If Greece offers to pay hedge funds about 34 percent of face value, it’s likely that the firms will agree to sell bonds valued at about 8 billion euros, Drakopoulos wrote in a report yesterday. As a result, Greece could retire at least 28 billion euros of debt, with the remaining sales coming from Greek banks, Cypriot lenders and European Union state banks, he said.
Hedge funds had almost no incentive to participate at Nov. 23 closing prices, according to Drakopoulos.
Those that bought earlier may be rewarded.
“We have obviously done quite well on this,” said Hans Humes, president of New York-based hedge fund Greylock Capital Management LLC, which owns Greek bonds. “To the extent that we can use the buyback as a partial exit from our position that is great.”