We explained it all in painful detail in January. We refreshed two weeks ago ("The Spanish 'Legal-Arbitrage' Bond Trade Is On") and then one week prior ("Spanish "Litigation Arb" Trade Is The New Killing It"). Now, finally, Citi's Matt King has jumped on board.
From: Stealth subordination
International bonds with negative pledges and tough Collective Action Clauses should trade at a premium to domestic bonds. While we think it is unlikely that their clauses are triggered, the protection they offer is significant – in Greece, some got paid out in full, while unprotected bonds were strong-armed into the PSI. With awareness of the risks likely to increase, we think this premium is underpriced in the market.
We obviously agree. And a bonus paragraph:
Poorly thought out ESM planning increases the chance of an accidental or early Spanish CDS credit event trigger. As sovereign CDS trades ‘old-R’, 30-year bonds are deliverable to any maturity CDS in a restructuring credit event. This has the effect of pushing down potential recovery rates. The combination should make the CDS-cash basis more positive than it would have been otherwise. That said, the basis is extremely positive already, and seems more likely to be influenced by the same pattern as in Greece, Ireland and Portugal, where an initially positive basis turned negative once bondholder selling overwhelmed CDS protection buying.