CDS and GREECE bonds

The day that everyone is expecting is round the corner. On Monday the auction for the Greek CDS is going to take place. According to the most recent data the Net volume is around 3billion so no-one should expect any surprises. In fact most probably it is going to be a non-event. That is unless there is counterparty failure. Chances of this are again slim as the EBA stress test did not show anyone with significant or threating size. So overall the auction should pass un-eventfully. What is more interesting is the list of deliverables that has been published and the price that the auction is going to settle at. Normally, in a credit event like a bankruptcy one should expect the auction to come very close to were the distressed bonds are trading. However, this is not the case here. The Hell.Republic trigger the CDS because of a restructuring event that destroyed all the Greek law bonds and replaced them with new ones. Thus one cannot easily predict or correlate his hedging with the real losses he has suffered. This of course is much wide issue and one that is not going to be resolved any time soon.

In any case, the list of deliverable bonds has been published by ISDA (click here) and it consists of the new PSI beauties and the Greek foreign law bonds. The list excludes some of the Foreign Law guaranteed and the JPY bond.

GREECE bonds. Guess around 59% voted yes already

For the foreign law bonds the situation is slightly more complicated. For each one of them there would be a bondholder’s meeting held on the 27^th-29^th of March in London (also one in Zurich for the CHF bond). Bondholder’s would be asked to vote whether they accept the exchange offer of the Hell.Republic or not. As each one of these bonds has already Collective Action Clauses a 2/3 or ¾ majority would be needed in order to successfully pass the amendment.

What are the chances of this happening and what are the possible implications? According to Greece’s statement 69% (or 19.5billion) of the non-eligible bonds were tendered or consented to the amendments. There are 28.31billion of non-eligible bonds but only 21billion are foreign law bonds. The rest 6.7billion are Greek law loans and one can safely assume that the Greek banks obliged and tendered all of them. If we subtract this 6.7billion then we find that the percentage of Foreign law bonds that voted yes is 59% or 12.8billion out of 21.6billion. This unfortunately does not say much as we need to know the percentages bond by bond. In any case, most of these bonds have a 2/3 CAC majority.

Now what would happen if someone has a blocking minority or even the whole bond (some are wholly owned by one non-greek investor). Assuming that they turn down the bond amendment then the Hell.Republic would have a dilemma:

1.      Continue to service these bonds and then try to buy them off in the secondary market. The Invitation offering allows for such a strategy.

2.      Stops paying them, in other words Greece causes a Failure to Pay.

The second outcome is slightly more worrisome than the CDS trigger event. This time it is not a restructuring event but the state refusing to pay. So far, Greece has never failed a payment. Doing so may actually have unpredictable consequences. Apart from tarnishing the already non-existing reputation of the Hell.Republic it may also trigger many other unforeseen events. For example Greece has more than 40 Bilateral Investment treaties. Are these under threat? What would the IMF say? It is very unclear as to what would happen if days after the exit from the restructuring and the upgrade by many rating agencies Greece were to declare a moratorium on some of the foreign law bonds.

Hell.Railways

Regular readers of this Note would remember the case of the Foreign law Hell.Railways bonds (OSE). There are 11 of them with a total notional value of 2.5billion (see table)

Issuer	Category	ISIN	Currency	Coupon	Maturity	Amount Left EUR
Hellenic Railways	ForLawGuar	FR0000489676	EUR	4.915%	13 September 2012	190,000,000
Hellenic Railways	ForLawGuar	XS0208636091	EUR	3.563%	21 December 2012	250,000,000
Hellenic Railways	ForLawGuar	XS0165688648	EUR	4.495%	02 April 2013	412,500,000
Hellenic Railways	ForLawGuar	XS0142390904	EUR	5.460%	30 January 2014	197,000,000
Hellenic Railways	Exchange	JP530005AR32	JPY	7.350%	03 March 2015	94,144,229
Hellenic Railways	ForLawGuar	FR0010027557	EUR	4.680%	29 October 2015	200,000,000
Hellenic Railways	ForLawGuar	XS0193324380	EUR	FRN	24 May 2016	250,000,000
Hellenic Railways	Exchange	JP530005ASC0	JPY	4.500%	06 December 2016	81,905,479
Hellenic Railways	ForLawGuar	XS0215169706	EUR	4.028%	17 March 2017	450,000,000
Hellenic Railways	ForLawGuar	XS0160208772	EUR	5.014%	27 December 2017	165,000,000
Hellenic Railways	ForLawGuar	XS0280601658	EUR	4.218%	20 December 2019	255,000,000

Many of them have a clause that could cause the bond to be accelerated. The offending Moratorium (Event of Default)clause states that: A general moratorium is declared by the Guarantor in respect of its External Indebtedness or the Guarantor announces its inability to pay its External Indebtedness as it matures or the Guarantor otherwise commences negotiations with one or more of its respective creditors with a view to a general readjustment or rescheduling of its respective indebtedness.

So in principle a bondholder can on the basis of this clause ask for his money back. If the issuer fails to pay within the assigned period (sometimes a week) then the issuer has defaulted on this bond. If furthermore this happens to more than 25million then Cross-Default clauses might trigger in which case many of the Foreign law bonds and not just the Railways may become immediately payable. Can this happen before the actual bondholder’s meeting? We do not know as we do not know who owns these jewels.