Tuesday 28 February 2012

PSI Invitation (Corrections to previous post)

Finally the offer to exchange and amend the Greek bonds was launched. It is a rather complicated offer and reading it sometimes feels that its purpose is to confuse rather than enlighten the investors into making a decision. If retail or non-institutional investors try to read it, they would almost certainly suffer a stroke. Furthermore, the Invitation cannot be forwarded to interested bondholders as this is illegal. They interested parties should go to the Greek website (www.greekbonds.gr) tick on all the disclaimers and download the 166 page document and then make up their minds. And this has to be done by 9pm CET on 8th March 2012 (unless it is extended, terminated or re-opened). I doubt that many retail investors have the requisite knowledge and time to comprehend this legal document. In any case retail investors were never consulted during the process. 

Designated Bonds, Exchange and CHF
There are three invitations memorandums running in parallel:
  1. The main one is called Designated Securities and consists of 197.1Billion of bonds divided into three categories:
    • The Eligible bonds. Greek law bonds. Total of 177.3billion.       
    • The Foreign law Republic bonds. Total of 16.9billion      
    •  The Foreign Law Guarantee bond. Total of 2.97billion.
    • All three categories are also solicited for votes in order to amend the Terms and/or introduce CAC’s
  2. The second is called the Exchange Designated securities and it consists of bonds totalling 7.9billion.
  3. Finally we have the CHF bond (538million) which is solicited only in order to amend the Terms.

The total amounts of the above three are 205.6billion. Out of these 21.6Billion are under non Greek (domestic law). This leaves 184billion under Greek law (Note that not all of these are Eligible).  Four bonds are exempt from the exchange (total of 7.98billion). They were also exempt in the first version of the PSI back in July 2011. We do not know the reasons. They are:

Pharmaceutical (Zero)
Many loans were included from OASA, OSE for a total of 5.8billion. The famous Goldman Sachs swap which is owned by the National Bank of Greece does not seem to be in the list. 
The offer was initiated on the 24th February and would terminate on the 8th March. The settlement would be on the 12th March 2012. The republic has the right to revoke the offer or extend it by 4pm CET 7th March.
For the foreign law bonds the bondholder’s meeting would be on the 24th-27th March and the settlement on the 11th April. 
Introducing the CAC amendment
Here is the fun part. If you tender your bond to be exchanged then you automatically give consent for the amendment.
Greek law bonds (Eligible Bonds)
  1. If you tender your securities for exchange then you automatically vote for the amendment.
  2. If you refuse to tender but participate then you can still vote for the CAC either in favour or against.
  3. If you do not vote for the amendment you cannot tender your bonds.
  4. If you do absolutely nothing then you do not tender any bonds and do not give your consent for the amendment. In this case you are not counted towards the total.
Blocking: If you participate and tender your securities then they are blocked. This means that your bonds cannot be traded during that time whether you tendered or not.
For the amendment to proceed at least 50% of the aggregate principle must vote (in favour or not). My understanding is that in the case of the Eligible bonds (177.3 Billion, Greek law) this percentage applies to the whole size. For the amendment to pass then you need 2/3 consents of these 50% of the 177.3 billion. Namely a minimum of 59.1billion of yes votes.
Foreign Law
For the Foreign Law Republic and Foreign Law Guarantee Bonds there would be meetings per bond to decide the amendments. If a bondholder has tendered his bonds for the exchange then he has also given his consent to the amendments. The meeting would be held later on the 24-27 March.

Greece Reserves the Right to Activate

In order for the CAC’s to be introduced to the Eligible bonds, at least 50% of the total aggregate amount must participate and 2/3 must give consent.  If only 88.6 billion (or 50% of the total) participate then only 59.1billion of yes votes would be needed. Thus we should expect that the CAC would be introduced almost certainly to the Greek law bonds. Just the Greek domestic banks and funds holding may be enough to introduce the CAC’s.
Once the amendment has passed then the Republic may choose to put them into effect. In other words, it is in their discretion to activate them and force everyone to participate in the exchange. The Republic also seems to have the right to leave out some bonds from this activation.

The introduction of the CAC’s would not in itself mean that they are going to be Activated. This is somewhat conflicting if one reads carefully the Greek law 4050/12 which states that they are automatically activated. They also mention that this law (4050/12) is not incorporated by reference in this Invitation. (page 4). It is all very confusing and perhaps a clarification is needed here. Nevertheless, the Republic in the Invitation asserts that:
  • The exchange would proceed if there is 90% participation. i.e more than 185.062Billion. In this case the Republic may or may not activate the CAC’s. This would leave around 20.5Billion of Hold outs. Many of these would be the Foreign law bonds.
  • If the participation is between 75% and 90% then the Republic may go ahead after consulting the official sector (Germany) to proceed with the offer. It may further activate the CAC to push the participation up to 90% or more. Here the Invitation uses the word “intents”. In other words they leave the options open.
  • If the participation is less than 75% and the consent on the CAC’s is less than 75% of the total debt then the republic will not proceed with the PSI.