Hedge funds are preparing to resist Greece’s attempt to cut its debt by holding out against a government bond buy-back in the hope of bigger gains later.
Greece had to offer a higher price than expected at a €10 billion buy-back 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 buy-back. That will leave Greece with less debt, underpinning the value of what remains.
Payouts and holdouts
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 buy-back 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.”
Others said the buy-back had put a floor under the price and limited the downside while still offering potential future gains.
Hedge fund holdouts are unlikely to prevent the buy-back from getting over the line, according to Nomura analysis, because of participation from banks. Hedge funds were estimated to hold up to €25 billion out of the total €63 billion in private creditors’ hands.
Funds are wary of disclosing whether or not they will accept the buy-back for fear of weakening their positions. Many will be hoping others will take up the offer, increasing their potential payout.
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 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 US hedge fund Elliott Management, which have said Argentina must pay holders of restructured bonds and holdouts simultaneously.
Reasonable outcome
Greece has not specified the value of bonds it hopes to buy back, but if it spends the full €10 billion at an average price of 34 per cent it can buy €28 billion worth, Nomura economist Dimitris Drakopoulos said in a note. With Greek, Cypriot and EU state banks almost certain to tender close to €20 billion of their holdings, getting hedge funds to tender another €8 billion at the higher prices “seems a reasonable and likely outcome”, Mr Drakopoulos said.
Many of the hedge funds built up positions when Greek bonds were as low as 11 cent on the euro after the national election in June, when the country looked close to exiting the euro. Funds refusing to participate in the buy-back are betting that the smaller amount of private debt left over will rise in price and they are less likely to face losses.
