Update: the expected next step: "GREEK 2023 BOND PRICE FALLS TO 14.51 PERCENT OF FACE VALUE" - but it was a "no brainer" trade... a "trade of the year" trade [8]... Tough break for Greylock. As we said [8]"Um, distressed bond expert guys - the bonds you should have bought are the old UK-law bonds which may return par...at least you had some covenant cover." Oh well - at least it is "other people's money."
Back on January 22, (Subordination 101 [9]), we advised readers that the one virtually sure way to make a killing in the bond market is to i) buy up a fulcrum Greek piece of debt, i.e., international/UK-law bond with strong covenant protection ahead of the country's restructuring, ii) refuse participation in the cramming down PSI, which was nothing but a GM-type exercise in covenant stripping, and iii) sit back and enjoy the money trickle in. Back than the €450 million bond of May 15, 2012 traded at ~75. Today, that same bond is about to generate a 31.26% cash on cash return, or 135% annualized, as it is Greece that has blinked, and according to the FT, has decided to make a full bond payment on this issue to avoid an out of control sovereign default, even though by doing so, it reduces its cash holdings by a third to just over €1 billion as discussed yesterday [10], and risks pushing both the PSI participants and its citizens into a murderous rage, as instead of complying with its mouthing off during and after the PSI, that not one bondholder would get a par repayment (nor apparently use the cash for public proceeds such as paying salaries), the one entity who ended up having all the leverage was those bondholders, who went against the grain, and held to their covenant rights. Just as we suggested. End result...
[11]
From the FT [12]:
Greece is set to repay fully a €450m bond that matures on Tuesday after failing to reach a deal with holdout investors including private banks and a US-based hedge fund.
The expected move marks a significant twist in the restructuring of Greece’s debts. “It was considered imprudent to default on a bond issue at a moment of political instability, when the country’s membership of the euro is being questioned,” said an official involved in the transaction.
The bond was issued under UK law unlike the €177bn of Greek-law sovereign debt held by private sector creditors which was restructured in March with investors taking a 75 per cent loss on their holdings.
Greece has enough funds to cover the repayment after receiving a €4.2bn transfer last week under its second bailout agreement with international lenders, a senior banker said.
“It was a sensible decision to pay up … In this environment you don’t want another negative shock,” the banker said.
The same official said the decision to repay the bond in full “would not have any bearing on future decisions regarding other similar bonds.”