A few days ago, before the definitive Greek PSI term sheet [9]was available, we presented the complete preliminary BNP PariBas [10]decision which despite having some assumptions was almost spot on in its flow chartness of Greek next steps. Today, to avoid any confusion on the matter, here is Bank of America with its take on the finalized Greek PSI Terms and the final final (until changed yet again) Greek decision tree.
From BofA's Sphia Salim (who may have borrowed an idea or two from BNP):
Greek PSI: total notional at €206bn; SMP holdings excluded
On 24 February, Greece released the Invitation that marks the start of the Private Sector Involvement (PSI). The Invitation is a combination of 1) an Exchange offer, and/or 2) a Consent Solicitation, applicable to a total notional amount of €206bn of Greek government bonds and government guaranteed bonds (some holders may receive only one of (1) or (2) due to regulatory requirements). We also note that the bonds that are held by the ECB and the NCB as a result of the SMP purchases do not count in the targeted €206bn notional.
There are still three possible outcomes for the Greek PSI
Depending on the percentage amount of the bonds that will be tendered for exchange and the percentage amount for which amendment consents are given, there are three possible outcomes: i) the PSI will go through voluntarily, ii) the PSI will go through via amendments enforced by the exercise of CACs (Collective Action Clauses), or iii) the PSI will simply be abandoned. We derive the scenarios leading to each potential outcome in a decision tree (Chart 1, page 3).
Tenders for exchange differ from consents for amendments
For the majority of the bonds, Greece will invite private sector holders to proceed voluntarily with two distinct actions: 1) to tender their bonds for the Exchange (details in FX snapshot 21-Feb), and 2) to submit a Participation Instruction to state if they would consent and/or vote in favor of a change in the terms of the bonds, with the amendments providing for the redemption of the affected bonds in exchange for exactly the same package as in (1).
A bondholder who agrees to (1) would automatically be considered as consenting in (2). On the other hand, a bondholder who does not agree to exchange his bonds voluntarily in (1) may still submit his consent for the amendments in (2). This may be what a holder who aims to benefit from a CDS trigger would do, as he may be in favor of the PSI only if it is enforced with the exercise of CACs.
66% is the threshold of Greek Law CACs, not the PSI target
Among the €206bn targeted bonds, a €177bn notional is governed by Greek Law while the remainder is subject to foreign laws. With the recently ratified Greek Bondholder Act, the terms of the aggregated €177bn of Greek law bonds can be amended with the exercise of specific CACs. More specifically, if deemed desirable, Greece would be able to enforce the exchange of these bonds so long as holders of more than 50% of the €177bn have tender their bonds or just submitted their instructions in (2), and more than two-third of these instructions correspond to a positive consent. Such a decision would trigger CDS, as the exchange becomes binding on all holders of Greek law bonds. It would also mean 86% of the targeted €206bn will be exchanged. The two-third threshold discussed here differs therefore from the minimum 75% participation targeted for the PSI.
If ≥ 90% participation can be engineered, it will be
If a) 90% of the €206bn of bonds are voluntarily tendered for exchange, or b) Greece has received sufficient consents and/or votes in (2) to enforce changes in the terms of some bonds through CACs (Greek law bonds in aggregate, and/or individual International law bonds), and guarantee that more than 90% of the €206bn would be either exchanged or amended, then the PSI would likely be completed with more than 90% participation. In the first case, Greece would be required to settle the exchanges and the PSI would be purely voluntary. In the latter, it would come with a CDS trigger and would therefore be subject to a consultation with the official sector creditors (See cases (a) and (b) in Chart 1).
If not possible to engineer ≥ 75%, PSI will be abandoned
On the other hand, we understand that the PSI would be abandoned if less than 75% of the €206bn have been tendered for the exchange, and Greece cannot enforce amendments in enough bonds based on the consents submitted, to guarantee that over 75% of the €206bn notional will either exchanged or amended (case (e) in the decision tree). We believe this should only occur if CACs cannot be enforced in the Greek Law bonds (because these would allow for 86% forced PSI), meaning that either less than 50% of the €177bn holders have tendered their bonds or submitted a Participation Instruction (be it positive or negative), or that those who submitted a negative Participation Instruction represent more than 1/3 of that set (aka blocking stake).
And now the chart you've all been waiting for
[11]