Tuesday 21 February 2012

New PSI bonds, ECB SMP NCB and CAC

Some of the details of the new PSI bonds were published today. Bond holders that tender their holdings to the PSI voluntary will get 15% in cash and 31.5% in new bonds with the following terms:
  • Y1-3: 2.0%
  • Y4-8: 3.0%
  • Y9-30: 4.3%
  • The bond will be amortized by 5% from Y11 to Y30.
Valuation: Assuming that the exit discount yield is 12% then the value of the package is 26.9% while with 9% exit yield this 31.9%. At 5% exit yield the value is 34.5%.

GDP warrants: The securities would also have detachable GDP warrants. We do not know the thresholds but we can assume that they are the ones that the Troika assumed in their debt analysis. We do not assign great value to these warrants since the rate is capped at 1%. The maximum payoff of these warrants has 12% value at 9% exit yield. Thus one cannot assign more than 2-3% present value to these warrants.

New bonds and warrants would be under English law with all the bells and whistles like Negative Pledge, CAC.
Interestingly both the EFSF and the bonds would have the same Paying Agent and payments would mirror the EFSF loan. I guess this was done in order to avoid paying one and not another bondholder in the case of a further default. 
The Eurogroup agreement allows for the non-SMP holdings to pass their profits to the Greek state by effectively lowering the interest rate payments. If this is so then the question arises:
  • Did the Republic swap the holdings of the SMP and the holdings of the NCB investment portfolio?
  • If they did then this is a gross violation as it implies some common bondholders were saved even though they did not buy the bonds for “monetary purposes”.
  • If they did not swap then either they are not going to participate in the PSI and the CAC’s will not be activated or they expect to suffer a haircut too.
My guess is that they were swapped and in this case they should expect litigation to fly.