While anyone (as we did) with an abacus and five-minutes of spare time from hitting the buy-button could have figured out that post-PSI 'new' GGBs would trade down hard, it is perhaps worth looking at some sensitivity analysis on both the shape of the Greek curve and the level (as well as the value of GDP warrants) before jumping on any bid from BNP in the grey. Of course, excitement over 80-90% participation rate rumors are somewhat irrelevant as CACs are as inevitable as hearing the phrase 'money-on-the-sidelines' on CNBC every day and whether its 77% or 97% is largely irrelevant - despite our equity market's ebullience. Morgan Stanley provides some color on the new GGBs, which they expect to trade at least 200bps wide of Portugal and with an inverted curve expecting prices to stabilize in the mid-20s (with technicals in the short-term pushing prices below 20). The GDP warrants are estimated at a fair-value around 1c and if the Argentine framework is any evidence, this will be heavily discounted (read ignored) by the market. All-in-all, not exactly positive but still buy stocks because 90% sounds like a good number!
Morgan Stanley: Greek Bond Market in Transition
Awaiting the final results and assuming a successful PSI, up to €65bn of new Greek bonds could appear in the market with average maturity substantially extended from around 7 years to 20 years.
Yields Likely to Remain Elevated…
Given that the Greek debt trajectory will remain challenging even after the PSI, we think that 20-year yields may range between 13-17% in the medium term.
…Even More So in the Near Term
However, we do not rule out bond prices dropping below 20 cents in the near term. In addition to immediate risks related to the elections and ongoing programme compliance, a supply shock could materialize. With lack of benchmark driven sponsorship and an ongoing structural shift in the natural investor base, supply/demand may find a near-term balance at an elevated yield.
GDP Warrant: How Attractive?
The structure of the Greek GDP-linked security is designed to limit the contingent liability for Greece that could arise from future payout. Our model estimates a fair value around 1 cent.
Putting It Altogether:
Material changes in the bond universe are likely to cause near-term shocks: A successful PSI would change completely the main features of the bond universe. About €56bn of old GGBs will remain, as a result of the bilateral bond exchange between ECB, NCBs and EIB and Greece; however those bonds are unlikely to trade in the open markets any time soon. Investors positioning and investment behaviour will most likely be affected by the sharp increase of average maturity of the Greek debt (i.e., from about 7- to 20-year) and by the fact that while the front-end may virtually disappear, the floating outstanding in the 10-30 year sector is set to stay stable at about €60bn.
Scarce initial marginal bid: As Greek debt is likely to stay out of the main DM and EM indices and the current shift in the natural investor base toward EM investors looks set to continue, a solid marginal bid may only appear at elevated yields. We see this as a major difference compared to prior EM restructurings, where benchmark driven sponsorship was available.
Absent any political and fundamental negative surprises, we think, bond prices may stabilize in the mid-20s in the medium term. However, near term adverse technicals are likely to push bond prices towards or even below 20 cents.