One of the funny things about the proposed Greek debt exchange offer is that, at least according to most recent fluid rumor, the cash coupon ceiling on the "post reorg" bonds, as dictated by the European finance ministers, will be 4% (hedge funds want more). So let's assume 3.5% for argument's sake. Perhaps the fact that the cash coupon of the US 30 Year note is roughly the same is somewhat concerning, because call us skeptical but Greek credit quality may be just a little worse than that of America - something which should be obvious to most. Except for European leaders of course. But that's fine - one can define cash coupons to be anything. After all the only thing that matters for bonds is yield, which Greece appears to have forgotten is determined by coupon and price. So since the Greek Debt/GDP will still be over 120% according to another set of rumors (after all, only a small portion of the country's debt is really getting impaired), it is 100% safe to say that in 30 years Greece will still go bankrupt. So let's say it deserves a comparable yield to its current 30 year bonds, which are priced to yield about 23%. We are being a little generous and estimate the fresh start bonds will yield 20% post break. Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par.
One can probably see why the hedge funds would be a little leery of converting existing claims into new paper which will immediately implode, especially since by doing so they relinquish all rights to sue Greece. If anyone thinks hedge funds wouldn't rather take their chance in court where they could potentially recoup up to par of the pre-petition bonds, we have a bridge from Athens to Santorini to sell you. And more importantly, if anyone is aware of a way to short these fresh-start bonds in advance of break, synthetically or otherwise, please let us know.
[5]
Source: BBG YASC