But bankers close to the transaction are voicing concerns that hedge funds might "blow up the deal" by holding out for a higher price.

Dealbook: Concerns Mount That Investors Might Balk at Debt Buyback in Greece

2012-12-05 22:11:35.628 GMT

Dealbook: Concerns Mount That Investors Might Balk at Debt Buyback in Greece

By LANDON THOMAS JR.

     Dec. 5 (New York Times) -- LONDON -- The hedge funds holding Greek bonds may have become too greedy for their own good.

     It's just two days before the books close on a plan to reduce Greece's debt load by having the country purchase its deeply discounted bonds from banks and investors. But bankers close to the transaction are voicing concerns that hedge funds might "blow up the deal" by holding out for a higher price.

     If the buyback fails, they say, the consequences would be severe. Not only could the International Monetary Fund refuse to lend more money to Greece, but wealthy European countries, already skeptical about extending yet another round of loans to Greece, could withdraw their support. In that case, the 40 billion euro-plus lifeline that the country needs to remain solvent would be in jeopardy.

      "People have fallen in love with their profits, and they have lost touch with the downside," said Petros Christodoulou, a top executive at the National Bank of Greece who presided over the 100 billion euro private sector debt restructuring earlier this year as head of Greece's debt management agency. "If this thing fails, there is total collapse, and the price goes to 20 cents."

     On Monday, Greece surprised the market by offering, in effect, to repurchase as much as 30 billion euros worth of bonds at an average price of 32 to 34 cents on the euro. That represents a roughly 5 percent premium to where the bonds were trading at the end of the previous week.

     Having borrowed 10 billion euros, the net debt relief would be around 20 billion euros. European officials feel that would be enough to satisfy the I.M.F.'s demand that Greece try to bring its debt level below 110 percent of its gross domestic product by 2022.

     But numerous hedge funds -- many of which scooped up Greek bonds in the mid-teens this summer and are now sitting on fat profits -- are telling Greece that they may not participate in the buyback. Instead, they are betting that the participation of Greek banks and short-term investors looking for a quick profit will be enough to get the deal done. In theory, the strategy would allow the hedge funds to cash out at prices of 40 cents and beyond when bonds rally in the aftermath.

     Buying Greek bonds on the cheap has become one of the more popular trades of late in Europe. Hedge funds like Third Point, Brevan Howard, Greylock and others have accumulated significant amounts of the debt.

     With the voluntary buyback deal in question, bankers are contemplating the use of sophisticated legal stratagems that could force investors to sell out at much lower prices.

     One possibility would be for the government to buy back as much debt as it can at current prices. Then Greece would come back with another lower offer; as long as two thirds of investors agree to the deal, collective action clauses would kick in, forcing reluctant investors to accept the government's terms.

Reaching that percentage would be easier, bankers say, as this time more of the bonds would be in friendly hands and would vote accept the offer.

     Legal experts have also pointed out potential loopholes in the contracts of the restructured bonds that would -- if push came to shove -- allow Greece to keep current on its bond payments to European governments while forcing private sector creditors to take a loss.

     In a further reminder of Greece's tenuous financial position, Standard and Poor's lowered its rating for Greek debt to selective default in a response to the buyback action. The rating agency said that when the buyback is finished, Greece's rating would return to its higher CCC level. Any move, however, by the country to deploy more forceful measures l would most likely result in Greek bonds keeping a selective default rating.

     "I am shocked that hedge funds are taking this so lightly,"

said a person with knowledge of the buyback discussions who spoke on condition of anonymity. "There is an 80 percent chance that the I.M.F. will walk if this deal does not work -- these guys have become their own worst enemy."

     In a deal this sensitive and crucial, there is always a fair amount of chest puffing as opposite sides push for the best possible outcome. The threat by hedge funds to not participate may well be a bluff to force Greece to up its price. Greece, on the other hand, has little to gain by forcing a bad deal on foreign investors at a time when it is relying on them to drive the privatization process.

     But, as in all games of chicken, the risk of collision -- or, in this case, a botched deal that results in Greece not getting its desperately needed money --- is never all that far away.

Copyright 2012 The New York Times Company

-0- Dec/05/2012 23:08 GMT