Monday, 5 March 2012

Greek PSI Titbits

Disclaimer: Please do not rely on this note for any decision as it may contain many errors, mistakes and/or misunderstandings. If you have any questions please contact or call +44 207 5470341 (Deutsche Bank) or +44 207 9926237 (HSBC)

If you are reminiscent of your school comprehension days then the documents presented by the Hellenic Republic would be an excellent exercise. It would take more than few times reading and re-reading it to get any sense out of it. We tried but we do not give any warrants, guarantees, representations, acknowledgements or undertakings that we did so correctly and we accept no liability whatsoever for whatever your actions may be after reading this communication, including but not limited to, dying of boredom, committing insane acts or simply falling asleep.

Important Dates
·         Invitation Expires 9pm (CET) on Thursday March 8th 2012.
·         Revocation deadline: 4pm (CET) on Wednesday March 7th 2012. A holder of Greek law bonds has the right to change his mind and revoke his vote by that deadline.
·         For Foreign law bonds the revocation deadline is 48hours before the schedule meeting of the bondholders (27-29th March).
Note1: Custodians may impose stricter limits to this expiration date.
Note2: The Republic has the right in its sole discretion to: Extend, re-open, amend and/or terminate any invitation in whole or in part with respect to one or more series of designated securities.
·         Announcement of results: This is going to happens as soon as practicable but only if the money is on the table by the Eurogroup, the EFSF and the EWG approval (page 10 and 3).
·         Bondholder’s meeting for the Foreign law bonds will be held between 27-29th March in Cleary Gotlieb and Steen’s offices in London at intervals of 30min for each bond.
·         Settlement date is Monday 12th March for the Greek law bonds and 11th April for the Foreign Law bonds.


The invitation unfortunately is not written in stone. The Republic has the right to stop the PSI in certain bonds while keeping others. In particular (page 12 also in 10):
“The Republic may, in its sole discretion extend, re-open, amend, waive any condition of or terminate or modify any settlement Date at any time (subject to applicable law and as provided in this Invitation Memorandum) with respect to one or more series of Designated Securities”.
In other words the Republic can do pretty much anything it wants to the offer. This freedom could be of use if the PSI is close to some threshold number. Suppose for example that out of 200billion bonds only 99billion turn up for the vote. In this case we do not have a quorum for the amendments. Now imagine a bond series with notional of 3billion where 2.9billion did not turn up for the vote. If it is removed then we have 197 eligible bonds and 98.9 of votes and presto we have a quorum. This calculation can be done after the results are known (page 37). In other words the Republic can pretty much do anything it wants and needs.

The Exchange

Depending on the jurisdiction of each bondholder, the Republic will free you from the burden of having a nominal of 100 Euro of old bonds and will lighten the load to
1.      31.5 of New Greek Bonds under English law
2.      15 of cash or near cash (EFSF bonds)
3.      A GDP warrant
In other words there is a 53.5% haircut on the Nominal of your holdings. But this is not the end of the story. As we said previously the 31.5 of new bonds are not worth exactly 31.5%. In fact depending on the exit yield of the Republic (The yield the Republic would be trading after the haircut) the value of this is between 5% (yield of 22%) and 12% (yield of 12%). The GDP is warrant is pretty worthless as the coupon is capped at 1% and it is a mystery why it was included. A lollipop would have been a better sweetener. So, the overall reduction to your worth (Nominal+NPV) is between 73% and 80%.

High haircut kills Participation
The very high haircut (close to 80%) poses in fact a much more serious problem. It makes bondholders indifferent to the offer and kills all the incentives anyone had or has. The last minute increase in the haircut was a big mistake by the Greek side or whoever sanctioned it. The reason is simple. We all know that the European banks would more or less participate due to the high political pressure upon them. Thus the Republic needs to convince the non-IIF and non-European holders to participate. Most of these bondholders have the bonds marked close to 20% or they bought the bonds at around 30 or less. The threat of a disorderly default for them is completely empty. They do not stand to lose more! If on the other hand the haircut was 70% or less then they could make a profit either by buying them in the market and submitting or by revaluing their books. Now there is very little they can do. Not tendering may in fact be their best option available as it has limited downside.

The Consent Solicitation
The Republic also wants your consent to activate Law 4050/12 that was passed on the 23Feb but the Republic never bothered to make public an English Translation. You can find an unofficial rand rough translation here. This is only valid for the Greek law bonds. The Republic would need 50% of the eligible bonds (177.309billion) in order to have a quorum and out of these it needs 2/3 in order for the Republic to have the right to activate the Law’s. Although not exactly clear in Law 4050, activation occurs only if the Council of Ministers approves the result!
So the maths works as follows:
·         For a quorum a minimum 50% of eligible bond is needed. Namely 88.654billion
·         For giving the Republic the right to activate a minimum of 59.103Billion is needed.
It must be obvious that the Republic will most likely get the requisite number of votes in order to have the right to activate the coercive exchange. After all it only needs 1/3 of the eligible bonds to be tendered for the exchange and Greek banks have close to 50billion.

How you Vote?

As a holder of an eligible bond you will have the following options:
A.     Tender your bonds for the exchange in which case you automatically give a YES vote to the Republic to activate Law 4050.
B.     Refuse to tender your bonds for the exchange but you vote YES to give to the Republic the right to activate Law 4050.
C.     Not Tender your bonds and vote NO to the Republic’s right to activate Law 4050
D.     Ignore the vote altogether.
There is some confusion as to option (D). In other words if you do not answer at all is it the same as (C)? If yes then your abstention is counted in the total as a NO vote. If on the other hand it is not the same then it means that you are not counted towards the total at all. My understand is that it is NOT the same as in (C) and bondholders who choose to abstain will not be counted towards the total.
Please check with your representative bank, broker, and custodian as to how they understand this option. Some may take your abstention as (C) or even something totally different like (A) or (B).

Voting for Foreign Law bonds. Revocation

For the non-Greek law bonds there would be bondholder meetings arranged per bond on the 27th-29th March. However, during the initial phase (up to 8th March) a holder of a foreign law bond would have the same voting options as those of the Greek law bonds (see previous paragraph).
A clarification is needed on the revocation procedure in case of the Foreign Law bonds. On page 6 and 27 it gives 48h whereas on page 25 it says that participation instructions are irrevocable. The difference seems to be (but not very clear) that if you give your consent to the amendments you have till 48hours before the bondholder meeting to revoke your vote. On the other hand, tendering your bond earlier may in some cases give irrevocably the right to Acupay to vote for you in favour of the amendments.
As it is not clear whether a holder still has the option to revoke his participation tender instruction after the 8th March bondholders may find optimal to abstain (unless there is an official clarification) and just go to the respective meeting to cast their vote.

Minimum Participation Condition. Bridge Loan and Failure to Pay

Here the document provides for three outcomes. The percentages are with respect to the Total amount of 205.6Billion
1.       Tenders of 90% or more. In this case the Republic is obliged to proceed with the offer. It does not say whether the Republic would in this case exercise the YES consent vote to activate Law 4050. We believe that in this case it would be imprudent to do so as it would hurt mostly retail bondholders for no significant economic gain. The 20billion (10%) that is left out would be mostly the Foreign law bonds (total of 21billion exist) that will not be touched by the Law 4050 anyway. Thus it would hurt disproportionally small retail holders.
2.      Tenders of between 75% and 90%. In this case the Republic would ask the official sector (EU countries, IMF, ECB) whether to proceed with the exchange with or without activateing Law 4050. Furthermore the Republic intents to activate Law 4050 and proceed with the amendments of the Foreign Law bonds if it thinks that more than 90% would be achieved in such a case.
3.      Less than 75%. Here is the tricky part. If the republic receives tenders for less than 75% of the total and has not received consent of at least 75% of the total (activate Law 4050 and also amend the foreign law bonds) then the republic would scrap the PSI.

Option (3) was meant to be the real scary disincentive for bondholders. If the collective will did not reach the 75% then the whole deal is off the table and Greece might disintegrate to a disorderly default. As explained earlier, that thought would have been valid if the haircut imposed was not as big. Now that the haircut approaches the 80% it does not make any real difference. Most bondholders are indifferent to such an event as they have priced/marked their bonds to 20% recovery already. In fact, in this game of chicken they stand to gain a lot more if the EU gets scared instead and provides a bridge loan to avert a failure of payment.
If that happens, then the PSI would be scrapped a bridge loan of 14.4 billion might be given out of the 30billion that would be available by then to pass the 20th March hurdle. Then a new offer, hopefully a more sensible and easy to understand would be structured. The alternative of letting a European country declare a moratorium of Failure to Pay is not a very attractive prospect even if this country is Greece.

Jamming or Derailing the PSI

As the dates for completing the PSI successfully are very tight there is still a chance that a bondholder could employ delaying tactics with a view to jam or derail the PSI. Page 23 discusses this and makes the offer conditional on not having any such legal complication. This seems to be a credible threat as even a 7 day delay could throw a huge spanner in the PSI works. For example it may take that long a time for a European or Greek court to decide that the bondholder’s objection has no merit. By that time however, the derailing is done.

Governing Law
The governing law of this so called invitation is Greek law, apart from the consent procedure with regards to the Foreign Law bonds.

Republic Reserves Right to Buy

This is very interesting provision that allows an escape route by the Republic in case something goes right or wrong. The Republic reserves the right to purchase any leftover bonds or make a different offer to those who refused the first one! The terms of the new offer may not be the same as the one currently on the table.
This provision may allow for the buying back of Foreign Law bonds.  Why would the Republic do so? Imagine for example that everything goes well with the Greek Law bonds and the 90% tender participation is reached. Then the Republic may cancel the Foreign Law bondholders meeting that it does not control for fear that one with a super-majority might cause credit event (Some of these bonds are owned by few foreign investors) and instead offer to buy them out. Or it may reach 80% (say) and after proceeding with the exchange offer to buy out the rest at a different price.

Credit Event, ISDA and Hell. Railways, Foreign Law Bonds
ISDA was asked to rule recently on whether the ECB swap was a credit event due to the subordination that it effected to the rest of the bondholders. That question was bound to fail. A more interesting question to ask ISDA would have been:
Does the exchange of ISIN’s between the Republic and the ECB constitute an event of restructuring according to the rules of ISDA?
In any case activating Law 4050 would be a credit event and the CDS would be triggered. So what would happen in this case to the Foreign Law bonds? This would very much depend on the terms of each bond. For example, sometime ago we posted a note on some of the default clauses of the Hellenic Railways (OSE) bonds. It basically means that some of these bonds are already in default as the Republic has breached the covenants. Has anyone holding these bonds started proceedings? We do not know.
So what would happen if bondholders in the Foreign Law bonds turn down the proposed amendments? Well, unless the Republic chooses to go for the big default; I.e. Failure to pay we believe that it would either pay the bonds or it would try to purchase the bonds or make a new purchase offer.