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Greek PSI - A First Attempt At Valuing

Submitted by Tyler Durden on 02/21/2012 08:46 -0400

From Peter Tchir of TF Market Advisors

Greek PSI - A First Attempt At Valuing

So here is the first official statement I’ve seen on the PSI.

For some reason, there is no real haircut on accrued interest. I took a look at all the GGB bonds (non English law bonds). That is just under €240 billion in notional outstanding. Clearly some of this is held by the ECB. Using a date in early March, I get the accrued interest outstanding on all these bonds to be about €7 billion. This interest will be paid with 6 month EFSF notes. Why wait 6 months to pay the accrued, and why use EFSF to do it? I’m sure there is a reason, but it’s not obvious to me. Why not subject the interest to a haircut? I assume it has something to do with the myth of it not being a default and bank book accounting treatment. But it is going to be over €3 billion going to creditors rather than to Greece. Since all the bonds are trading with accrued and 6 month EFSF paper should be about par, this is already included in the bond prices.

The EFSF will issue bonds of not more than 2 year maturity equal to 15% of the notional. It seems that at the same time the EFSF will enter into a deal with Greece. Investors who get the 2 year EFSF bonds won’t have any Greek risk, but since Greece will be paying the EFSF in some sort of agreement, that won’t reduce Greece’s debt outstanding. There is no mention of what coupon (if any) the EFSF bond will have. Let’s assume the bonds would trade at 99% of par (the coupon will be fair, and this is just the bid/offer). That would provide just under 15 points of value. (as details on the EFSF bonds become available, a more accurate estimate of value can be made).

Bond holders will also receive 31.5% of their notional in new Greek 30 year bonds. From this, it seems like they will be bullets (though have read some reports that they will be amortizing). They pay 2% until 2015, 3% until 2021, and 4.3% thereafter (they were clearly designed around the IMF 2020 target). A 10% discount rate would give these bonds a value of about 36% and at 15% it drops to 21%.

So depending on what yield you apply to the new Greek bonds, then the package is worth 21.5% to 26.25%. Since bonds are trading with accrued and accrued will be paid in 6 months, the real question comes down to what you believe is the value of these new bonds. If there is an amortization schedule, that would change the valuation positively.

Investor also get a GDP linked “kicker”, but it is capped at 1% per annum, starting in 2015. This has some value, particularly if Greece starts growing, as the discount rate should also improve, but tough to attribute much value to this at this stage. If the notes are amortizing, the value of the kicker decreases, since it would be on a lower notional.

We still haven’t seen retroactive CAC clauses implemented, but assuming that they are, I’m not sure why the Troika would accept a 95% rate and not trigger, but it seems worth taking the risk. The ECB swap may be illegal. The retroactive CAC may be illegal. The Troika seems like it wants to pretend there is no default if at all possible, in spite of the write-down of more than 50% of the debt.

Zerohedge had a Goldman Sachs report that shows the bonds paying 5% in principal each year starting in 2023. Using flat yield curves for now, that would add about 4-6 points of value on the long bonds, so about 1 - 1.5 points to the entire package. Will the EFSF bonds have a coupon, and how much wider than France should they trade? If the 2 year EFSF bond had the same 2% coupon as the Greek bonds, it could trade above par. If it is a zero, the value is more like 97%. In the end that is just rounding error on the package value.

More details to come. Again, I find it hard to see why you would agree if you aren't a bank and it looks like they are prepared to pay holdouts at par.

By the time the deal is sorted out in mid march, we may have had enough data that the plan would already be obsolete.

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Tue, 02/21/2012 - 08:47 | 2180390 Angel Face

Blah blah blah bitchez. This Greek shit is like Lucy with the football

Tue, 02/21/2012 - 08:56 | 2180402 economics1996

Where do I go to sign up?

Tue, 02/21/2012 - 08:52 | 2180396 Ghordius

"The ECB swap may be illegal. The retroactive CAC may be illegal."

Peter, this depends from who's laws and who's courts. It is a question of jurisdiction.

Tue, 02/21/2012 - 08:56 | 2180401 disabledvet

I GET IT! "IF THERE'S NO COURT TO ADJUDICATE SAID DISPUTE IT'S NOT ILLEGAL!" I mean..."why don't you TELL US THEN Ghordius?"???!!!!

Tue, 02/21/2012 - 08:58 | 2180406 economics1996

There has not been rule of law in Europe or America for decades. The law comes out of the ass of the head Yid in charge.

Tue, 02/21/2012 - 09:14 | 2180426 Ghordius

dear disabledvet, you are used to the US courts and laws ruling on the whole world, independently from their jurisdiction.

this might make you blind to the fact that the specific legal system to which you are accustomed to is based on the principles of Common Law. In most countries in Europe (leaving the UK and Ireland out) other principles apply, most commonly called Roman-Law-based or Napoleonic.

some of those bonds are subject to the Greek jurisdiction. others to other's jurisdictions. Nobody ever made a case in any court of CDSs being legal, for example. but there are many, many legal cases which would be judged differently in different countries.

I am merely hinting to the fact that this might be the case, same as Peter Tchir hinting that some UK or US court may find the deal illegal.

Tue, 02/21/2012 - 09:42 | 2180491 oogs66

the whole system is insane...and they won't have one court system, but they want us to believe they will have eurobonds? insane.

why are bankers getting bailed out, when they should have been able to figure out the potential consequences like law changes anyways

Tue, 02/21/2012 - 12:50 | 2181254 Ghordius

who wants you to believe we will have eurobonds? your bankster in London? his friend in NY?

and by the way, two words: MF Global. show me the prosecution, show me the arrests...

Tue, 02/21/2012 - 21:12 | 2182995 disabledvet

I don't have a beef with a .... "Napoleanic Code." Start the inva....i mean...liberation now! That 'll void your contracts. And yes...you can add New York City to the list, too. I'm not sure the pretext...but i think the big suprise would be for all involved how many more rights you have in actuality under the Uniform Code of Military Justice.

Tue, 02/21/2012 - 09:44 | 2180501 oogs66

the whole system is insane...and they won't have one court system, but they want us to believe they will have eurobonds? insane.

why are bankers getting bailed out, when they should have been able to figure out the potential consequences like law changes anyways

Tue, 02/21/2012 - 17:58 | 2182415 Excursionist

I'll try again with this question (no answer last time) - on what basis could the ECB exchange be illegal? Because Greece cannot effect a partial redemption? Because Greece needs the consent of senior-most securities holders before issuing super-senior paper? Something else?

Tue, 02/21/2012 - 21:16 | 2183008 disabledvet

it works under the little known "make it so" standard. Here's an real world example:
http://www.youtube.com/watch?feature=player_detailpage&v=-ZxHAZChcYU

Tue, 02/21/2012 - 09:00 | 2180409 LongSoupLine

When you have "non-elected" bank puppets in control of an entire empire, you expect "legal"?

Tue, 02/21/2012 - 09:00 | 2180411 buckethead

In which jursdictions is it permissible to change the rules when it is to the benefit of certain parties?

Tue, 02/21/2012 - 08:54 | 2180397 disabledvet

the "healthy ones" are still trying to bail themselves out. "the tell is that the paltry CDS trigger of Greece will not be allowed." Contagion fear is real...spreading to Spain as I write this. The folks doing the negotiating already know Greece is a "done deal"...in effect WELL outside the euro-zone now. They literally use the term RINGFENCING to describe it! In other words "all eyse on Spain"--and then we'll see if Super Mario can save Italy or not. I must say among other things "ringing in my ears"...the term "mild recession" keeps bouncing around up there.

Tue, 02/21/2012 - 09:07 | 2180425 bdc63

Jim Rogers was right ... the ONLY thing that matters here is whether or not CDS's get triggered and banks have to take the fall for this. And since, as we all know, the banks have a firm hold on all the balls of all politicians everywhere, the CDS's will NEVER be tiggered.

The only way a CDS will EVER get triggered here is if they sell all those insurance contracts to the Treasury at par the day before ... :( .... oh shit ...

Tue, 02/21/2012 - 08:54 | 2180398 bigdumbnugly

"The ECB swap may be illegal. The retroactive CAC may be illegal. The Troika seems like it wants to pretend there is no default if at all possible, in spite of the write-down of more than 50% of the debt."

legal? legal? are you talking about legal?

we don't need no stinkin legal.

hands on ears tralalaladodeedodeedalalalala

Tue, 02/21/2012 - 08:56 | 2180403 trebuchet

And appetite.

Its simple, if CDS triggers, disorderly default looms, contagion, meltdown, no one gets paid. Cept hedgies, so if they hold out to the end, this is a possibility.

of course, they better game is to hold out to 11:59, then in principle sign up with a modifed " we want to revisit this package in the future"

which will suit the EU just fine, since it will only have to pay 1Q worth of bailout before going back to a late night supper-dance in Brussels again....

Tue, 02/21/2012 - 08:57 | 2180404 Alex Kintner

"retroactive CAC clauses"
Geez TD, please spell check! It's spelled "radioactive"

Tue, 02/21/2012 - 08:59 | 2180407 bdc63

cnbc is reporting this morning that the private sector "has accepted a 53% haircut" ... uhm .... no. the govenment 'sector' has decided on behalf of the private 'sector' that their "voluntary" share will be 53%. BIG difference.

Tue, 02/21/2012 - 08:59 | 2180408 trebuchet

the algos dont know that. and its too technical for main newssound bites.

Tue, 02/21/2012 - 09:46 | 2180503 oogs66

well the banks have signed up, because they have sold themselves to the ECB for cheap funding and a deep bid for the bonds they own.

Tue, 02/21/2012 - 09:01 | 2180414 HD

"Illegal" does not apply to TPTB. The sad thing is that they know it, we know it, they know we know they know it, and we too know that they know that we know that they know it...and they don't care. The don't have to care - just like the phone company...

http://www.youtube.com/watch?v=k9e3dTOJi0o

Tue, 02/21/2012 - 09:03 | 2180416 falak pema

The word illegal does not exist in the language of Central banks. Like bankruptcy...Central banks make their own legal uber-alles sovereign rules and their own money. So sovereings are by definition above the law and never bankrupt.

First lesson of Nation State. Now gone continental. It time to screw the HF scavengers to hell.

Tue, 02/21/2012 - 09:09 | 2180429 trebuchet

Q How to fund the EFSF, capitalise the Greek and other EU banks and take "losses" on profits to help fund the Greek bailout?

A: Ctrl + P

Kerchchttinnnng !!!!

Tue, 02/21/2012 - 09:02 | 2180418 Everybodys All ...

Of course it's illegal of course the courts will be bought off ... can you say unintended consequences. This is far from good for any bond market trader when the rule of law and contract law can just be ignored and broken for the elite.

This is Fascism and it is ruling the day in the EU.

Tue, 02/21/2012 - 09:06 | 2180427 Hugo Chavez

I feel guilty but I enjoy watching this train wreck.

I enjoy watching socialism run out of other peoples money.

Tue, 02/21/2012 - 09:18 | 2180450 trebuchet

+1 that is brilliant

Tue, 02/21/2012 - 12:35 | 2181176 Going Loco

Quote is from Margaret Thatcher. Now there's someone who wouldn't have stood for any of this nonsense.

Tue, 02/21/2012 - 09:12 | 2180437 valley chick

One nagging question....How can anyone play in this broken market anymore? Next up Spain, Portugal....when does this broken corrupt market stop?

Tue, 02/21/2012 - 09:40 | 2180490 SwingForce

So tell me, why spend the effort to mathematically figure this out Peter? Do you recommend buying any of this shit? If I wrote the story, it would be much shorter.

Tue, 02/21/2012 - 09:43 | 2180496 cnhedge

will the cac be triggered?

http://www.jinrongbaike.com
http://www.cnhedge.com

Tue, 02/21/2012 - 11:45 | 2180922 Canucklehead

http://voxeu.org/index.php?q=node/6821 I'm thinking that the TARGET2 payment system hasn't been properly re-balanced. If the ECB collateral take a hit, TARGET2 collateral gets re-evaluated and I suspect could well fracture that payment system.

Tue, 02/21/2012 - 12:37 | 2181188 Going Loco

Simon Johnson flagged up months ago that the European payments system would be the thing that breaks.

Tue, 02/21/2012 - 21:30 | 2183040 disabledvet

that would be bad. and a "simple payment system" is not as simple as most people think...especially here where "they think of it as just an enter button." in the USA because of the centralization of our financial system (a quirk of history in my view and not as Europe believes "because of a centralized state") you can "do a Paulson" and just throw this thing together in three pages. In Europe this is incredibly complex--and use to involve a lot more than mere..."euro's." somewhere along the line "banking became uncool" in Europe.

Wed, 02/22/2012 - 03:41 | 2183787 sikefeier0728