Traditionally, hedge fund managers that go public with multi-page slideshows bashing this or that asset, usually end up in tears (see Bill Ackman) as long as said asset is not some microcap, illiquid stock. That, however, has not stopped David Salanic of Tortus Capital Management to not only mass distribute a presentation highlighting his latest and greatest short idea but to create a website that implicitly highlights his investment thesis. The site in question is called http://rehabilitatingportugal.com/ [9], and the asset that Salanic is bearish to quite bearish on, are Portuguese bonds.
Of course, slamming Portugal bonds on the day when the country returns to the capital markets by selling its first €3.25 billion 5 year bond offering (which as Bloomberg reports was nearly 4 times oversubscribed) at 330 bps over midswaps in the post-bailout era, makes it doubly risky. That said, the herd momentum is always fickle, and what everyone is buying today may be dumped en masse tomorrow. And Tortus' reminder that nothing has been fixed in Portugal, and in fact that the country desperately needs a Greek-style PSI debt exchange which wipes out a portion of the country's debt, may be just that catalyst. Or then again, a la Ackman, the market may just ramp Portuguese bonds even higher and force Salanic to cover at a major loss (assuming he has exposure).
Either way, the market will decide. Or whatever passes for a market these days.
Cutting to the chase it, Tortus' underlying thesis is simple: Portugal's situation is not sustainable because it is drowning in debt...
[10]
... And it is. But so is every other European country when one adds up all the "adjusted" if all too real, debt figures. What makes Portugal so special?
* * *
Below is the verbal summary of the Tortus presentation:
Portugal’s Status Quo Is Not Sustainable
- The Troika Calls the Portuguese Program “On Track” But It Is Actually Very Much “Off Track”
- The Troika’s Forecast of Falling Debt/GDP Starting 2014 is Wishful…
- …but Not Attainable Because “Kicking the Can Down the Road” Has Made the Problem Worse
- Portugal’s Government Bonds Are Subordinated To A Mountain of Debt…
- …but the Troika Program Had Protected Portuguese Government Bonds Until Now…
- …And Now The Portuguese State Is Left to Issue Excessive Levels of Debt in the Markets…
- …While Competing With Portuguese Banks and Corporations For Funding…
- …And As Fundamentals Start To Matter the Capital Market Window May Face Pressure
- Portugal Has Excessive Public and Private Sector Debts, Highly Financed by Foreigners...
- …Which It Can Neither Outgrow Nor Devalue
- The Alternatives For Portuguese Workers Are Lower Pay or Fewer Jobs…
- …Putting the People In Precarious Financial Positions
- Portuguese People Unfairly Carry The Full Burden of The Adjustment While Speculators Profit…
- …which Has Caused a Loss in Political Consensus…
- …and Forcing the Constitutional Court to Reject the Government Budget Repeatedly…
- …to Restore Some of the Lost Equality
- High Debt Is Also Killing the Corporate Sector…
- …As an Increasing Majority of Portuguese Corporations Cannot Sustain Their Debt Burdens…
- … Leading to Continuously Lower Investments and More Aggressive Accounting
- The Long-Term Growth Outlook Is Even Bleaker
Portugal’s Sovereign Debt Is Not Sustainable
- Debt/GDP is the Most Commonly Used Metric…
- …and Portugal Ranks Poorly on that Metric…
- …but the Debt Burden Matters More…
- …and Portugal’s Debt Burden is Too High…
- …Especially Considering its Inability to Further Increase Tax Rates…
- …Or Cut Government Expenditures.
- The Debt Servicing Capacity is Low…
- …However Growth & Structural Reforms can Increase Debt Servicing Capacity…
- …But Only Enough to Service 70% of the Existing Debt Outstanding…
Portugal Already Benefits from Extraordinary Levels of Solidarity
- Portugal Already Benefits from Very Generous Fiscal Transfers from the European Union
- Euro-Area Central Banks Are Providing Significant Funding through the Target2 System
- The ECB’s LTRO Program Finances 9% of The Portuguese Bank’s Liabilities
- The ECB Already Purchased 11% of Portugal’s Sovereign Debt and 23% of its Bonded Debt
- The EIB Has Lent More Funds to Portugal than to Any Other Country Relative to GDP
- The European Rescue Funds EFSF and EFSM Represent 22% of Portugal’s Sovereign Debt
- The IMF Already Represents 12% of Portugal’s Sovereign Debt
- Europe Has Already Given Portugal an OSI Without Asking for Concessions From the Private Sector
Common Misconceptions
- Misconception #1: Portuguese Growth Has Turned the Corner
- Misconception #2: Exports Can Save Portugal
- Misconception #3: Portugal’s Bond Exchange Was A Success
- Misconception #4: A Portuguese PSI Would Lead to Portuguese Bank Recapitalizations
- Misconception #5: A Portuguese PSI Would Create Contagion Risk
- Misconception #6: Portugal Is Not Hiding Debt
- Misconception #7: The Greek Sovereign Restructuring (PSI) Was a Mistake
And there you have it. Full presentation below - for the sake of Tortus let's just hope Icahn doesn't take the other side of the trade (pdf [11]).