"Fear Of Missing Out" - that is the only way one can explain the irrational idiocy with which asset "managers" are scrambling to allocate other people's money into today's "historic" Greek (where unemployment just printed at 26.7%) return to the bond market, and which according to Greek PM Venizelos was eight times oversubscribed, or far more demand than for the Facebook IPO. Ironically, while we joked earlier this week, when the Greek 5Y was trading in the 6% range that the new bond would issue at 3%, we were not too far off on the final terms which were largely expected in the mid-5% range. Instead, Greece shocked everyone when it announced that the avalanche of lemmings had made it possible for Greece to issue debt at a sub-5% yield, and a 4.75% cash coupon! Here is the final term sheet.
- Issuer: The Hellenic Republic
- Amount: €3 billion euros ($4.15 billion, upsized from €2.5 Billion
- Maturity: April 17, 2019
- Tenor: 5 Years
- Yield: 4.95%
- Coupon: 4.75%
- Rating: Caa3/B-/B-
- Underwriters: BofAML, DB, GS, HSB, JPM, MS
- Governing Law: English
Additionally, as the Greek finmin said, "Demand for the bonds was very strong. Participation of foreign institutional investors is expected to approach 90 percent." And participation of other people's money will reach 100%.
Earlier today the Hellenic Republic announced its intention to access international bond markets for the first time since early 2010. Greece’s attempt to regain market access is a result of a combination of macro drivers, which we have highlighted since mid-2012 and which remain in place:
1. Greece is gradually exiting a deep recession, having shed almost 25% of its nominal GDP between late 2009 and late 2013. At the onset of the crisis, the economy featured large imbalances, which pointed to the economic pain set to follow. To mention a few: a very wide primary budget deficit (near 10% of GDP), a current account deficit amounting to almost 14% of GDP, uncompetitive levels of unit labour costs, and significant frictions in the operation of labour and product markets.
The structural adjustment programme for Greece, beyond its significant cost in terms of economic activity, has helped address some of these imbalances, at least in part. The country now runs a primary surplus, which currently hovers north of 1.5% of GDP and which different official sector estimates place north of 4% on a structural basis. In addition, the current account deficit has been eliminated, unit labour costs are at lower levels than before the Euro adoption relative to EMU averages, and there have been elements of reform in labour and product markets.
As a result, the outlook for the Greek economy is starting to reverse. Investors are expecting mildly positive growth rates and are reducing the required premia to lend the government of the country.
2. After significant losses for bond investors and for governments, Greek debt has been restructured substantially. Despite the sharp rise in the ratio of debt to GDP (north of 175% of GDP), interest payments for Greek debt have been reduced so that the average cost of borrowing remains at or below pre-crisis debt servicing levels (around 4-4.5% of GDP) and the largest part of this is deferred cash payments (and hence requires no market financing to cover). By 2016, more than 80% of Greek debt will be in official hands. And the agreement between Greece and its EMU counterparts is that further debt relief may become available – possibly in the form of maturity extensions of already long-dated official loans and interest burden reductions. Therefore, it is becoming increasingly clear that the probability of default for the Greek foreign law government bonds is low and declining.
3. The Greek government has regained credibility by showing willingness to adopt reforms, which, although unpopular, have helped the country’s recovery prospects. Equally, the EMU governments have shown uniform support towards that effort, largely smoothing the relationship between the country and the Euro area core. So, although Greece's debt levels are still high, the probability of a disorderly solution has declined
It wasn't all lunacy. According to Kleinwort Benson, the pricing was "irrational." From Bloomberg:
- New 5Y GGB should have been priced 100bps higher to be at fair value given Greece’s credit risk, Fadi Zaher, head of bonds and currencies at Kleinwort Benson, says in interview.
- Greek sale said to exceed EU3b as nation ends 4-year exile from international markets
- Pricing of bond is “better than what the Greeks themselves had expected:” Zaher
- Now is ideal time for Greece to issue, amid investor “euphoria” over euro area; sale shows resumption of confidence in country
- Kleinwort Benson chose not to buy because of medium- and longer-term risks surrounding nation’s high debt levels, even though bond may perform well in near term
- Cites example of Argentina: “They went through different phases of debt restructuring, and the problems resumed”
- GGBs don’t look attractive in terms of risk-adjusted returns
Who cares. The bubble is growing, the music is playing, and one must dance. Rinse. Repeat.