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Back To The Drawing Board: S&P Says Greek Rollover Debt Plan "Would Likely Amount To A Default Under Our Citeria"

Tyler Durden's picture




 

Last Wednesday we cited from a Reuters report, according to which the last ditch Greek MLEC/CDO rescue operation, would be welcome to S&P and Moody's as "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." Because absent a decree of no EOD, the whole thing is pointless. Well, as often turns out, this was yet more wishful thinking on behalf of some bureaucrat, masked as fact. S&P has just come out with the following: "In recent weeks, a number of proposals relating to this  topic have surfaced, and the particulars in some cases are evidently still  in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria" and specifically: "we believe that both options represent (i) a "similar restructuring"
(ii) are "distressed" and (iii) offer "less value than the promise of
the original securities" under our criteria. Consequently, if either
option were implemented in its current form, absent other mitigating
information, we would likely view it as constituting a default under our
criteria
."
Goodbye MLEC 2 - as expected you were just as useless as your first iteration back in 2007.

Full S&P note:

On June 13, Standard & Poor's Ratings Services lowered the long-term rating on the Hellenic Republic (Greece) to 'CCC' from 'B'. In part, the downgrade reflected our view of the rising risk that an enhanced official financing package addressing the Greek government's 2011-2014 financing needs could require private sector debt restructuring in a form that we would view as an effective default of its debt obligations under our ratings criteria. In recent weeks, a number of proposals relating to this topic have surfaced, and the particulars in some cases are evidently still in flux. This credit comment looks at the most prominent of the recent proposals, put forward by the Fédération Bancaire Française (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria.

The FBF proposal currently envisions French-regulated financial institutions agreeing to either of two options regarding their reinvestment of proceeds from Greek government debt maturing between July 2011 and June 2014. Based on recent public statements by European policy makers and bank executives, we believe the options FBF has put forward on the refinancing of Greece's maturing debt were made at the behest of Greece's eurozone official creditors. We broadly summarize these options below.

Under the first option, French financial institutions would invest at least 70% of the proceeds of their maturing Greek government bonds in newly-issued 30-year Greek government bonds (New Thirty-Year Bonds). The transferability of the New Thirty-Year Bonds would be restricted for the first 10 years of their tenor (but eligible collateral for ECB repo operations). They would bear interest at 5.5% plus a margin equal to the percentage of real annual growth of the Greek economy, capped at 2.5% and floored at 0%. The Greek government, in turn, would be required to apply a portion of the issuance proceeds to the purchase of zero-coupon 30-year 'AAA'-rated bonds issued by one or more sovereigns, supranational institutions, or European agencies, with the principal and interest from such 'AAA' debt calculated to repay in full the principal amount of the New Thirty-Year Bonds.

Under the second option, French financial institutions would invest at least 90% of the proceeds of their maturing Greek government bonds in newly-issued five-year Greek government bonds (New Five-Year Bonds). The New Five-Year Bonds would also include restrictions on their transferability, and the interest rate coupon would be the same as on the New Thirty-Year Bonds described in option one. We understand there would be no investment of any part of issuance proceeds in 'AAA' debt under the second option.

The relevant Standard & Poor's criteria pertaining to the financing options described in the FBF proposal are found in "General Criteria: Rating Implications of Exchange Offers and Similar Restructurings, Update," published on RatingsDirect on May 12, 2009. This criteria describes the principles Standard & Poor's follows when analyzing the credit effects when distressed entities attempt to restructure their obligations. Depending on the circumstances, Standard & Poor's views certain types of debt exchanges and similar restructurings as equivalent to a payment default. Under our criteria, two conditions must be met for a debt exchange or similar restructuring to qualify as an effective default: (i) the transaction is viewed by us as distressed rather than purely opportunistic, and (ii) we take the view that the "exchange or similar restructuring" will result in investors receiving less value than the promise of the original securities.

Although we do not consider either FBF financing option as strictly being an "exchange," we are of the view that each falls into the category of what our criteria terms a "similar restructuring." This is because we believe--based on recent public statements of eurozone policymakers--that the aim of the financing options is to reduce the risk of a near-term debt payment default or debt restructuring with haircuts and give the Greek government more time to undertake fiscal consolidation and policy reforms. We also believe that the proposed options respond to the desire of eurozone creditor governments to slow the growth in their own exposure to Greek government credit risk. We note, too, the public expressions of concern by many policymakers about the potentially damaging consequences of a near-term Greek default of any kind on the capital positions of some European banks and that such a default might trigger greater financial contagion in Europe and globally.

Our criteria further states: "For an exchange offer to be viewed as distressed, we must decide that, apart from the offer, there is a realistic possibility of a conventional default (i.e., the company could file for bankruptcy, become insolvent, or fall into payment default) on the instrument subject to the exchange, over the near to medium term." In our view, Greece's near-term reliance on EU/IMF official financing, the government's difficulty in reducing its sizable fiscal deficit, and the current pricing of Greek government debt in the secondary market all underscore the Hellenic Republic's weak creditworthiness and, consequently, point to a "realistic possibility" that either financing option would fit the "distressed" category. (We also note the announcement on July 1, 2011, by the Institute of International Finance--a global organization with membership drawn, among others, from large banks, insurance companies, and investment management firms--that some of its members might, under certain conditions, be willing to buy back Greek government bonds at market prices well below par.)

In addition, our criteria outline the characteristics of "distressed transactions" that, individually or collectively, we consider when forming an opinion on whether the resulting newly issued debt has "less value than the promise of the original securities," a primary condition of a distressed exchange or similar restructuring:

    The combination of any cash amount and principal amount of new securities offered is less than the original par amount;
    The interest rate is lower than the original interest rate;
    The new securities' maturities extend beyond the original;
    The timing of payments is slowed (e.g., zero-coupon from quarterly paying, or bullet from amortizing); or
    The ranking is altered to more junior.

In our view, the third and fourth characteristics can be found in one or both FBF financing options. In both options, investors would purchase new securities with somewhat higher interest rate coupons than the maturing debt. But unlike other investments investors would have been likely to make with the proceeds of maturing Greek debt, the New Five-Year Bonds and the New Thirty-Year Bonds would have restricted transferability for extended periods--in our view because, given current market conditions, both the New Five-Year Bonds and the New Thirty-Year Bonds would likely trade at a price significantly below par. In addition, we note that the tenor of the New Thirty-Year Bonds under the first option is far longer than the original maturities of any outstanding Greek government bonds, and we take the view that the intent of such extended maturities is to slow the timing of future principal repayments quite significantly. We also note that speculative-grade rated issuers rarely, if ever, are able to access market financing with such a long tenor. Taking these considerations into account, we believe that both options represent (i) a "similar restructuring" (ii) are "distressed" and (iii) offer "less value than the promise of the original securities" under our criteria. Consequently, if either option were implemented in its current form, absent other mitigating information, we would likely view it as constituting a default under our criteria.

In that event, we would likely lower Greece's issuer credit rating to 'SD', indicating that it had effectively restructured some, but not all, of its bond debt. We also note that an 'SD' action on the issuer credit rating would likely occur only once, and that, were either FBF refinancing option implemented, a 'D' issue rating would be assigned to the maturing Greek government bonds upon their refinancing in 2011. But, once either option is implemented, we would assign a new issuer credit rating to Greece after a short time reflecting our forward-looking view of Greece's sovereign credit risk. At the same time, we would likely rate all debt issues, including debt refinanced between 2011 and 2014 under the FBF options, at the same level as Greece's new issuer credit rating.

In summary, the growing risk that the Hellenic Republic might engage in a distressed debt restructuring was one of the reasons we lowered its rating on June 13 (see, "Long-term Sovereign Rating On Greece Cut To 'CCC'; Outlook Negative"). While we would likely view the FBF proposal, if it proceeds in its current form, as an effective default, we recognize that it is just one of a number of proposals attempting to address the Greek government's 2011-2014 financing needs and the sustainability of its future debt burden. We understand that the FBF proposal may change, and it is possible that it could take a form that results in a different rating outcome. Regardless of whether the current FBF proposal is implemented, however, we continue to believe the Hellenic Republic's uncertain ability to implement the revised EU/IMF program is a key risk weighing on its credit standing.

 

 

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Mon, 07/04/2011 - 07:57 | 1423784 hugovanderbubble
hugovanderbubble's picture

if no default why keep paying and wasting  money into CDS market....CDS market may close.

Cos NEVER would happen a Credit Event with such crap of Financial lawmakers.

 

Just remember the 2 entities which controls the CDS market and ICE ( JPMorgan and Goldman Sachs)

 

-If CDS market goes NULL Trading income for Jpmorgan and GS will hurt.

 

This is the biggest legal Scam ever done.

 

Any Greek Debt = DEFAULT 100% other things are lies and more lies.

 

Next Ireland, Portuguese, Spanish ,Belgian and Italian Bonds.

 

China u will eat Eurojunk in SAFE  and C&C Sovereign Wealth Funds ....

Short Hong Kong

Mon, 07/04/2011 - 08:08 | 1423828 Popo
Popo's picture

So let me get this straight:  These rating agencies are perfectly willing to overlook massive changes in accounting laws which render utterly insolvent companies, magically "solvent".    But they're putting their foot down **now**?

Someone has obviously forgotten to include a provision under which the ratings agencies make a boatload of under-the-table money on this deal.

 

 

Mon, 07/04/2011 - 08:19 | 1423840 hugovanderbubble
hugovanderbubble's picture

+1

Exactly,

 

Soft Reprofiling = Haircut yes or yes, its the new euphemism to lie European and WorldWide European Debtholder.

Greeks will never pay, Greece needs to devaluate and get back to Drachmas the same has done by Iceland, its hard but its the best thing to preserve the real economy in Greekland, other thing is just, wasting (or gaining some  months/time) for banksters, meanwhile they place into the market more Collateralized Products to swap this junk structures into Chinese Portfolios. China is becoming Financially Stupid more and more trusting  in Eurozone, but its normal they need Europe to expand its philosophy of " no life just work without unions, just work, no life, in general terms to continue developing a world with no intangible values.

 

LETS get back to protectionism¡ China has crushed the entire world (Illegal Competence)

 

Thats why the European Union wants to create its own Rating Agency...to avoid " Financial Terrorism by Fitch, moodys and Standard&Pums¡"

 

 

 

Mon, 07/04/2011 - 08:21 | 1423846 Bob
Bob's picture

That's the elephant in the room, alright.  WTF happened to mark to market?!

Mon, 07/04/2011 - 08:34 | 1423866 Urban Redneck
Urban Redneck's picture

The ratings agencies are trying to make sure their TBTF banking customers remain whole on existing investments in Greece.  Since at the end of the day it is the FED and Treasury that will monetize the Eurozone bailouts- to avoid directly bailing US TBTFs again.  They will at some point probably lean on S&P and tell them to tow the company line, the ECB will change a comma or two in the MLEC2, and present a "new" plan, and everyone will be silent.  The industry knows at some point it is going to have to take a haircut on some debt, but that won't stop them from delaying and minimizing the exposure and loss as long and as much as possible.  So until the FED and Treasury tell the bankers to shut up and take what's offered- we have kabuki theater, and hopefully a flight to the USD and bonds (from the Treasury's perspective), allowing them to postpone QE^next. 

Mon, 07/04/2011 - 20:15 | 1425350 Cursive
Cursive's picture

@Popo

Excellent comments from everybody and you succinctly captured the rank hyprocrisy of the ratings ladies. I wish I knew their angle.

Mon, 07/04/2011 - 07:35 | 1423785 Bob
Bob's picture

Problems, problems.  When are the banksters gonna figure out a way for the rating agencies to get paid on this deal?

Mon, 07/04/2011 - 07:42 | 1423788 Rynak
Rynak's picture

If they haven't by now, then there is probably no easy way. Either this statement by S&P is just bargaining/theater, or they simply won't bent over unless it someway is compliant with their criteria.

Mon, 07/04/2011 - 07:41 | 1423789 oogs66
oogs66's picture

So they would rate it D for about 2 days?  It would have no impact on the banks if they do this.  As I've said all along! 

Mon, 07/04/2011 - 07:42 | 1423790 nmewn
nmewn's picture

What!?!

There's nothing wrong with that credit card!...run it through again and get the manager over here!

The nerve.

Mon, 07/04/2011 - 18:30 | 1425220 New_Meat
New_Meat's picture

Lad--I'm off to burn some beef and the correct white meat.  I hope that this Independence Day has some rather more recent meanings in addition to the usual family and reverent festivities.  New translation of the Federalist Papers is promising (I'm shosh' through).

Wishing you and yours the best.

- Ned

Mon, 07/04/2011 - 07:45 | 1423792 bigwavedave
bigwavedave's picture

Tyler: You are starting to sound more and more like Reggie..... Back off the me me me meme

Mon, 07/04/2011 - 07:47 | 1423796 Rynak
Rynak's picture

I think you are mistaking S&P with (the) tyler(s).

Mon, 07/04/2011 - 07:51 | 1423803 bigwavedave
bigwavedave's picture

"Last Wednesday we cited from a Reuters report"

Mon, 07/04/2011 - 07:54 | 1423807 Rynak
Rynak's picture

Oh noes, ONE selfreference in the entire article!

Do you have any idea how many selfreferences (the) tyler(s) make in some other articles? You pick an article with minimal "me me me", to complain about "me me me"?

Not disagreeing with your overall point, but the timing couldn't be worse.

Mon, 07/04/2011 - 07:56 | 1423811 bigwavedave
bigwavedave's picture

Yeah well I dont even read reggie anymore because of it. Even though he has good analysis I just cant get through the 'reggie told you so.... when...here....' crap. Its just too tiring. And he has never ever heard of jpg compression. Prick.

Mon, 07/04/2011 - 08:09 | 1423830 Popo
Popo's picture

Is your avatar having a seizure?

Mon, 07/04/2011 - 07:54 | 1423808 bigwavedave
bigwavedave's picture

I am just tired of the same 'Like we said.... when... here...." crap. It isnt effective or professional. I guess i would be forgivable for sites and commentators that have no audience. But for ZH this needs dropping. 

Mon, 07/04/2011 - 08:05 | 1423822 Bob
Bob's picture

As you point out, it can be overdone.  WRT Tyler, however, I don't agree that he has crossed that line or, for that matter, even come close to it.

Mon, 07/04/2011 - 08:05 | 1423824 Fazzie
Fazzie's picture

   Nobody likes the "I told you so" guy, but ZH has the right to crow when they really did tell you so. Theyve been right about a lot of things lately except when they go into "Tom Clancey" mode and think Iran or something is about to be invaded.

 

Mon, 07/04/2011 - 12:13 | 1424412 decon
decon's picture

I agree, very un-Fight Club like.

Mon, 07/04/2011 - 08:05 | 1423826 Tyler Durden
Tyler Durden's picture

Um... it is there to provide a hyperlink jump point. Feel free to read encyclopedia brittanica if it is more attuned with your stylistic and narrative needs.

Mon, 07/04/2011 - 08:30 | 1423856 DavidC
DavidC's picture

Quite.

DavidC

Mon, 07/04/2011 - 20:27 | 1425365 Cursive
Cursive's picture

@TD

It is good to know the history and context of a post. Don't change a thing.

Mon, 07/04/2011 - 07:45 | 1423793 ArkansasAngie
ArkansasAngie's picture

Moral Hazard applies to systems, too.

 

 

Mon, 07/04/2011 - 08:47 | 1423899 Zer0head
Zer0head's picture

'Moral Hazard" is so 2008

Mon, 07/04/2011 - 07:49 | 1423797 Ghordius
Ghordius's picture

Louis Gargour, chief investment officer at LNG Capital gives some comments on this on Bloomberg

http://www.youtube.com/watch?v=QFoio_dA3i0&feature=feedu

He reminds us at the end about how this things are done: "...the example here is Latin America in the eighties.

There was a Baker plan, (kick the can down the road, lend money, austerity
then came the Bradley Plan (with the "Bradley Bonds") writing debt down, extending maturities, etc. so that they can service the debt.

It seems that this French idea is not (yet) that welcome at the moment.

Mon, 07/04/2011 - 07:48 | 1423799 Tense INDIAN
Tense INDIAN's picture

Fuck the GREEKS ...read this for a change ::::

 

http://www.henrymakow.com/001399.html

 

i wonder how will the GERMANS react to find that they had BEEN DECIEVED....BIG TIME

Mon, 07/04/2011 - 08:12 | 1423834 spanish inquisition
spanish inquisition's picture

So I will extrapolate and propose that the Obama birth certificate issue has been to prevent his "actual" father from being traced back to the Rothchilds. He is actually a controlled illuminati rube through his time in the CIA, now doing the bidding of his masters by furthering wars and bailing out their interests....

I was going to be sarcastic. but after typing it out, it doesn't seem that far off.

Mon, 07/04/2011 - 07:51 | 1423806 MadeOfQuarks
MadeOfQuarks's picture

I don't get it...so S&P have started actually rating risk now? Why? What's their angle?

Mon, 07/04/2011 - 08:05 | 1423823 hugovanderbubble
hugovanderbubble's picture

All Rating Agencies has started to analyze the Rollover Bond Scheme for Greek , which implies a massive hidden losses for German and French Banks (Yes or YES)

They have been lending to Greece with higher risks, now they have to pay their lack of risk controlling. Not me , not you. Im sorry for French banks specially, but this is not a zero sum game.

Greek will  never payback its debt, so everything is such a ECB final fantasy to avoid the Euro Collapse.

 

Again and again matchball in process.

 

But the most funny thing are US Munibonds which are currently in worst situation that most of the European Debt tranches.

 

 

Mon, 07/04/2011 - 08:15 | 1423837 Bob
Bob's picture

Perhaps the angle here is for the suddenly "renegade" American rating agencies to demonstrate some apparent credibility in the case of Greece so that later, when the states start blowing up, they will appear consistent when they insist on no haircuts for those bondholders and open the door for their toadies in government to roll out the greatest asset privatization program in the history of humankind as the "only solution." 

Mon, 07/04/2011 - 09:03 | 1423938 JOHNICON
JOHNICON's picture

That should be "final solution."

Mon, 07/04/2011 - 13:23 | 1424604 Bob
Bob's picture

snap

Mon, 07/04/2011 - 07:58 | 1423813 steve.stuart
steve.stuart's picture

using the same criteria what would they rate USA?

Mon, 07/04/2011 - 08:07 | 1423818 Rynak
Rynak's picture

Devaluation isn't considered reducing..... value.....

Mon, 07/04/2011 - 08:09 | 1423831 hugovanderbubble
hugovanderbubble's picture

USA indeed is not the big problem

 

Are the Munibonds sir.

 

Next Crisis is not in the Eurozone, is in Municipal and SubGovernment US debt.

 

Debt Ceiling is not an issue, Is something necessary to avoid the infinite keynesian model of printing debt without deleveraging. Monetary offer will be reduced 30-50% next 10 years.

Mon, 07/04/2011 - 10:27 | 1424117 Cameli
Cameli's picture

I wonder what their "criteria" for sub-prime were then? From not being able to rate a mortgage to being qualified to pronounce on soveign debt? Give me a break. These people don't have "criteria" only big mouths. Meredith Whitney would be a perfect fit there.

Mon, 07/04/2011 - 08:08 | 1423829 rufusbird
rufusbird's picture

going after people who are not paying them anything yet...

Mon, 07/04/2011 - 08:45 | 1423892 johngaltfla
johngaltfla's picture

Shorting the Euro looks like the play of the day now. Then again it has hit a major resistance area and is due to collapse as it should. The funny thing is S&P is more proactive on Greece than they ever were on CFC, WM, or IMB.

Mon, 07/04/2011 - 09:02 | 1423935 sbenard
sbenard's picture

What a suprise! NOT!

The only real surprise is that they haven't called the U.S. as a technical default yet. It's coming!

Mon, 07/04/2011 - 09:15 | 1423966 MadeOfQuarks
MadeOfQuarks's picture

Yep, but after the fact, naturally, so as not to cause a panic.

Mon, 07/04/2011 - 09:41 | 1424004 Freebird
Freebird's picture

That NOT thing - is that like 1930s Vaudeville or something?

Mon, 07/04/2011 - 10:28 | 1424121 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

Am I the only one imagining a future where the US government announces that they are still capable of paying their debts but choose not to and so, are not "in default"?

Mon, 07/04/2011 - 10:52 | 1424182 CrashisOptimistic
CrashisOptimistic's picture

Guys,

You all know better than this.  After two years of careful analysis and extrapolation, you KNOW perfectly well they can legislate definitions and manufacture a change of whatever rules to get the result they want.  This is not science.  This is not mathematics.  This is all arbritrary. 

They will redefine things in very detailed form to create a facade of logic, but they are going to get the result desired and the mechanism . . . we will try hard to understand the mechanism and see how it all "makes sense" . . . the mechanism truly doesn't matter.  It's all contrived AND DOES NOT HAVE TO BE CORRECT.

There is only one thing that they can't wave a hand and make different than it was before.  Understand this at the core of your intellect.  The one thing is geology and oil.  The SPR release was their attempt to pretend, and it's failing.  They cannot manufacture physics, and that, and only that, will be the end.

Mon, 07/04/2011 - 11:08 | 1424235 Law97
Law97's picture

US stock futures aren't giving back one point of the 640 point runup last week.  Let's see, +640 points because Greece avoids default, -0 when two days later they default. Not literally, of course, but you would expect just a bit of the shine to come off last week's Greece-based spectacu-rally.

Actually, the one thing most bullish anaylysts are forgetting is that the softness in stocks over May and June was due mostly to deteriorating US economic conditions, NOT Greece.  They think now that Greece is fixed, we can make new highs. 

Remember the 1.8% GDP number, horrible jobs #, the housing double dip?  None of that has gone away.  So even if Greece is off the table for the time being, that does nothing to address the main reason for US stock market softness: the deteriorating US economic picture, the latest slightly better than expected PMI/ISM numbers notwithstanding.

Mon, 07/04/2011 - 12:06 | 1424397 Libertarian777
Libertarian777's picture

Actually makes one wonder why we even pay fund managers any money. Particularly bond managers. Is their sole criteria the portfolio mandate? So if it says only invest in AAA screw the actual analysis and just invest.

I would have hoped that any bond manager, except maybe a distressed fund, would have exited PIIGS bonds last year.

It's funny how they'll keep playing the game to extract those last few cents out the bond (and get the big bonus) while the risk profile grows exponentially, until the 'credit event' occurs.

Mon, 07/04/2011 - 12:06 | 1424398 Libertarian777
Libertarian777's picture

Actually makes one wonder why we even pay fund managers any money. Particularly bond managers. Is their sole criteria the portfolio mandate? So if it says only invest in AAA screw the actual analysis and just invest.

I would have hoped that any bond manager, except maybe a distressed fund, would have exited PIIGS bonds last year.

It's funny how they'll keep playing the game to extract those last few cents out the bond (and get the big bonus) while the risk profile grows exponentially, until the 'credit event' occurs.

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