A quick look at the Fresh-Start Greek Government Bond (GGB2) complex shows that as of this morning it has tumbled to fresh all time lows across the curve, and now trades at a more than 50% loss to the March PSI conversion price (remember the "no brainer...trade of the year"... good times).
The reason for this dump is not so much on fear of a Greek exit, but once again a reflection of precisely what we expected would happen, and as explained in our January Subordination 101 post. Last week, the fact that a PSI hold out, holding English-law bonds managed to get par recovery while all the other lemmings have so far eaten a nearly 90% loss, has sparked a realization among all the other hold outs that since they have covenant protection, they should all demand the same treatment. And indeed, another one has stepped up, only this time not a holder demanding par maturity paydown, but one who has read their bond indenture and was delighted to find the words "negative pledge." As Bloomberg reports "a holder of Greek bonds that weren’t settled in the biggest-ever debt restructuring said he’ll demand immediate payment unless the government posts collateral against his investment. Rolf Koch, a private investor who says he holds 500,000 Swiss francs ($528,000) of the notes due in July 2013, argued that he’s entitled to equal treatment with Finland, which made getting collateral a condition of contributing to Greece’s second bailout. He wrote to the paying agent, Credit Suisse Group AG, invoking the bonds’ so-called negative-pledge clause, according to the text of a letter seen by Bloomberg News."
What does negative pledge mean? Simply that there is collateral protection in case of a cram down, such as what happened to Greece. And what's worst is that there are many more such bonds: this will merely be the precedent:
Greece issued the Swiss-franc bonds in 2005 under international rather than domestic law, which allowed holders to sidestep the more than 50 percent losses suffered by other investors in last month’s debt restructuring. If Koch is successful, other investors may follow his lead by claiming that the concession gained by Finland breaches the requirement that fresh debt doesn’t win priority over existing bonds.
“They broke the negative pledge when they gave collateral to Finland,” Koch said in a phone interview yesterday from Muehltal, Germany. “Now they should offer the same to me or pay me back.”
Finland’s insistence on getting collateral last August threatened to derail the Greek bailout as other euro members sought similar terms. In the end, Finland had to abandon a bilateral deal with Greece that granted it cash security and accept an arrangement unattractive enough to deter imitators.
The deal involves the Nordic country speeding up its payments to Europe’s rescue fund. The collateral it receives is in the form of triple-A rated bonds due in 15 years to 30 years, paid for by a trustee selling Greek government notes transferred to it from domestic banks. This arrangement also allows Greece’s government to deny involvement.
Greece, of course, is quick to try to claim there is no foundation for the legal claim (hint - there is):
“There is no involvement of the Hellenic Republic,” Petros Christodoulou, the head of the Public Debt Management Agency in Athens, said in an e-mail yesterday. Adam Bradbery, a London-based spokesman at Credit Suisse, said he was unable to comment.
Finland’s agreement, full details of which weren’t made public, won’t trigger negative-pledge clauses on Greek government bonds, the Finnish Finance Ministry said on Oct. 3.
Uhm, right there is a great example of why one should have hired better lawyers. Because the "sorry, the dog ate the invisible contract" excuse just doesn't fly in international bond law circles. And since this is merely this is the beginning, here is what's next:
There are 7 billion euros ($8.9 billion) of international bonds issued or guaranteed by Greece still outstanding after the sovereign restructuring, according to data compiled by Bloomberg.
Only now, months after the PSI, do the PSI non-hold outs realize the folly of their ways.
As for the "negative pledge", now may be a good time to remind readers where this suddenly hot topic will be a big issue in the future.
From January 24:
Portugal Reenters Bailout Radar As Traders Realize Greek "Rescue" Model Is Not Feasible Here
Remember when Europe was fixed, if only for a few weeks? Those were the times, too bad they are now officially over. EURUSD is back under 1.30 in thin volume because even as we "shockingly" find that, no, Greece did not have the "upper hand" since Greek bondholder negotiations just broke down (and that over the matter of a cash coupon delta between 3.5% and 4.0%, which implicitly means that from a bondholder IRR perspective, when taking a 15 cent EFSF Bill into consideration, the hedge fund community fully expects the country to be in default even post reorg in at about two years). But it is that "other" European country which was recently junked by S&P (causing the 10 year to soar to new records), that is now the focus point of (re)bailout concerns. Reuters reports: "The euro nudges down some 20 pips to $1.2995 in thin, illiquid trade with Tokyo dealers citing renwed fears Portugal may need a second bailout. Undermining the glow of Lisbon's achievements in reforming the country's labour market is the rapidly rising market concern that it is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks." And here is the paradox: if Greece succeeds in persuading the ad hoc creditors to accept a 3.5% coupon, which it won't absent cramdown and CDS trigger, Portugal will immediately if not sooner proceed with the same steps. There is however, a problem. Unlike Greece, where the bulk, or over 90%, of the bonds are under Local Law, and thus have no bondholder protections (a fact about to be used by Greece to test the legal skills of asset managers who can retain the smartest lawyers in the world and generate par recoveries on their bonds in due course), in a generic Portuguese Euro Medium Term note Programme prospectus we find the following:
Oops: negative pledge (a simple one at that, not that garbled monstrosity of verbiage that some Greek bonds have) and UK-law. Looks like the Greek Modus Operandi of dealing with its uber-leverage problems will be quite hindered (read impossible) when its comes to Portugal, where a substantial portion of its sovereign debt actually does have significant creditor protections. It also means good luck not only trying to enforce a coercive cram down, but also attempting to layer on a primed piece of debt with liens on top of the EMTNs (i.e. IMF bailout capital), without every asset manager in possession of these bonds suing the country into oblivion at a London court of law.
Finally look for creditors to flock to these bonds at the expense of any other bonds (Interbolsa, older issues) that do not, as we predicted over the weekend.
So much for the Greek deleveraging case study applied to other European countries: think fast Troika.