Hedge fund eyes 35 pct return from Greek bonds buy
London-based hedge fund firm Adelante Asset Management has bought a
position in the cut-price bonds of debt-laden Greece, betting that
efforts by European politicians to restructure its debt mountain will
provide a short-term boost to bond prices.
The firm, which
specialises in emerging markets debt, bought a basket of bonds at 12.5
cents shortly before Greek elections this month, won by a
conservative-led government promising to negotiate softer terms on its
tough international bailout.
Adelante CEO Julian Adams told
Reuters the firm hopes to sell the position, which accounts for 2
percent of its portfolio, at 16 or 17 cents, which would produce a
return of roughly 35 percent.
"We think they (the politicians)
will cut a deal in the short term. It's a tactical position. As the
bonds appreciate we'll take profits,» he said on Thursday.
Bets by
hedge funds, which are often secretive about their trading positions,
on Greek bonds have proved highly controversial with many European
politicians in the past.
Last month the country made a last-minute
about-face and paid bondholders who rejected an earlier debt exchange,
yielding hefty profits for hedge funds who bought the debt at a
discount.
Adams said that rather than buying individual
maturities, which can be less liquid, his position is in an
equally-weighted basket of 20 bonds of different maturities, ranging
from Greece's 2023 bonds to its 2042 bonds.
A Greek bond maturing in 2042 is currently trading at around 13.5 cents, Thomson Reuters data shows.
Greece,
where Europe's debt crisis began, went through the biggest sovereign
debt restructuring in history in March, slashing its debt mountain by
around 100 billion euros, or close to a third.
But its new bonds
still trade at distressed, default levels and remain rated well below
investment grade, preventing most conservative mainstream investors from
buying them, although a number of hedge funds have taken the plunge.
Ten-year
Greek bonds have fallen 30.5 percent in total return terms since the
start of the year, according to Thomson Reuters data, making them one of
the worst-performing major bond markets.
However, Adams said historical precedents in emerging markets mean the bonds should be worth more than current prices.
"Fourteen
cents (approximately the current price) is way below recovery value in
any emerging market debt scenario. The next debt reduction will
inevitably come for the official sector,» he said.
"After the
Argentinian debt default, bonds initially traded at 30 cents, though
they drifted. Once they were restructured, the recovery rate was 45
cents on the dollar. Ecuador did a buyback at 35 cents in the dollar."
Euro
zone leaders agreed on Friday to take emergency action to bring down
Italy's and Spain's spiralling borrowing costs and to create a single
supervisory body for euro zone banks by the end of this year.
Adams
added that the legal terms of the bonds means the holder would be paid
out in euros, rather than a new currency, should Greece exit the euro.
[Reuters]
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