Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World [11]", we said that "because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security. And since the notional outstanding here is tiny, it is quite easy to build up a blocking stake in the bonds and to obtain full control of the process, especially since the ECB appears to have been building up its own stake in local-law bonds....As anyone who has ever overseen or participated in a bankruptcy process, the biggest trump card one can attain is to build up a blocking stake in a fulcrum security (just ask Carl Icahn) . Because it does not matter who has a majority. What matters is who has 33% + 1 of the vote to block any consensual deal." In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-make whole take out settlement.
Alas, we underestimated the stupidity of the European authorities who in their pursuit of a prompt if messy conclusion to the Greek restructuring, which ended up with a CDS trigger, were left with a tranching of the Greek balance sheet into a ridiculous seven classes [12], which crammed down the Greek law bonds into yet another separate class, an outcome which will shortly bite the European pre-petition sovereign market (i.e., Portugal, Spain and Italy) in the ass. What we did not however underestimate at all, is the critical value of strong indenture provisions, or, in other words, the willingness of UK-law bondholders to not comply with terms forced down their throat. As reported earlier today by the Greek Ministry of Finance, a whopping 20 of 36 classes of non-Greek law bonds have rejected the nation's attempts to restructure, and now appear set for an epic legal showdown, whose outcome will determine whether or not the UK non-UK law spread will explode, or if the entire European bond market will shoot itself in the foot itself, after all strong indentures appear to be merely a bond prosectus placeholder which will never be honored. Most importantly, we are delighted that UK-law bonds have understood one thing - by being the fulcrum security as we said, they have all the leverage. If Greece thinks it can take them in court and not pay them anything, well that may well be the ballgame for the European bond market.
Bloomberg's take [13]:
Investors in Greek bonds issued under foreign law rejected the nation’s attempts to restructure the debt at talks last week.
In 20 out of 36 meetings, bondholders either turned down the government’s proposal, adjourned the talks or failed to achieve a quorum, according to a press release today from the Greek Public Debt Management Office.
The meetings involved holders of about $26.8 billion of foreign-law notes denominated in dollars, euros, Swiss francs and yen. Investors owning $15.3 billion of securities agreed to a restructuring, leaving $11.5 billion still to be dealt with.
“The key thing with the international bonds is that holders have to vote bond-by-bond rather than in aggregate,” said Thomas Costerg, European economist at Standard Chartered Bank. “That makes it easier for investors to block the restructuring and raises the question of what Greece can do now.”
Which is precisely what appears to have happened. And $11.5 billion is a non-trivial amount in whose favor any European court will ultimately rule. translation: more bailout money from the IMF, or America, will be needed to satisfy the demands of those hedge funds who did not fold like a cheap chair when they too got 'Rattnered' in the early part of March.
Greece’s options include opening talks with holdouts to reach a mutually acceptable compromise, paying up in full or refusing to pay at all, according to London-based Costerg.
“Paying up in full would raise the issue of fairness regarding the domestic-law bondholders, while a hard default would make litigation likely,” said Costerg. “The bottom line is that this reminds investors that the Greek crisis and the euro-area crisis aren’t over.”
Holders of a 450 million-euro floating-rate note that falls due on May 15, the closest maturity on the international bonds, rejected the restructuring deal, according to the press release.
The country has a 30-day grace period to make the payment, data compiled by Bloomberg show. How to handle the debt maturity will be an early test for a new government that may be elected as soon as this month to replace Prime Minister Lucas Papademos’s interim administration.
Looks like June 15 will be a very interesting day in the neverending slide down the European insolvent rabbit hole, since the country which has supposedly restructred in a prearranged fashion, will suddenly find itself served with a notice of default by a class of bondholders whose indentures has been violated across the board. That said, we are confident that the end result, for those who bought UK law bonds in the 20s and 30s, will be a par return, if only with a modest delay: a case study which will make all future PIIGS restructurings virtually impossible due to hold outs finally getting the hang of it.
As for Greece: congrats on the first-moved advantage. Too bad nobody else will have that now.
Full list of bonds that want nothing to do with coercion, as well as those who got Rattnered.