Hedge Funds Try to Profit From Greece

Date: Thursday, January 12, 2012
Author: Jesse Westbrook and Julie Cruz, Bloomberg

Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.

Saba Capital Management LP, founded by former Deutsche Bank AG (DBK) credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions who declined to be identified because they weren’t authorized to speak publicly about the trades. Officials at the three firms declined to comment.

They’ve amassed the stakes as the government lobbies investors to accept a swap that would cause losses of more than 50 percent for bondholders. For the deal to avoid triggering credit-default swaps that could cause losses for more of the region’s banks, the agreement has to be voluntary. Hedge funds may not agree to the deal.

“I would expect to see some holdouts,” said Sudeep Singh, a hedge fund manager at Matrix Group Ltd. who doesn’t own Greek debt. “The industry breaks down into guys who want to keep on fighting and into guys who just want to get the best deal and move on. It’s all a question of what price you got in at.”

Some fund managers say they have little incentive to accept the swap, and are seeking full payment. If Greece refuses to pay the funds what’s owed to them, the funds may seek to trigger the credit-default swaps. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

‘Credit Event’

European officials, including former European Central Bank President Jean-Claude Trichet, have tried to avoid a default that would cause what he called a “credit event.” Triggering the CDS could encourage traders to increase their bets against other indebted European nations such as Italy, Portugal and Spain --worsening the debt crisis.

Saba bought Greek debt maturing in one year, Weinstein said at an investment conference in September. The price paid factored in at least a 75 percent chance of default, said Weinstein, whose New York-based hedge fund oversees about $5 billion. His biggest fund climbed 9.3 percent last year, according to a person briefed on its performance. New York-based York Capital also owns Greek sovereign debt, according to another two people.

Greek officials held meetings last year with CapeView Capital, the fund started by former Deutsche Bank executive and Trafalgar Asset Managers Ltd. founder Theo Phanos, to discuss the firm’s sovereign debt investments, said another two people, who declined to be identified because the meetings were private.

Sarkozy, Merkel

Officials led by German Chancellor Angela Merkel and French President Nicolas Sarkozy persuaded banks in October to agree to exchange their Greek bonds for new securities with longer-dated maturities and lower coupon rates, as part of a tentative accord aimed at slashing the nation’s debt and halting the spread of a crisis that has plagued Europe for more than two years. Banks and politicians are still negotiating the exact level of losses imposed on private bondholders in the swap.

Greek Finance Minister Evangelos Venizelos said yesterday that discussions with private bondholders on the swap “have advanced and are now at a very good point,” according to a statement released by the government. Venizelos is scheduled to meet in Athens today with Charles Dallara, a managing director at the Institute of International Finance, which represents banks that hold Greek debt.

ECB Holdings

Of the 355 billion euros ($450 billion) of outstanding Greek debt, about a third is held by the ECB, the European Union and the International Monetary Fund, according to estimates by Open Europe, a research Group based in London and Brussels.

The swap would slice about half of Greek’s remaining 200 billion euros of debt, most of which is owned by banks. About 80 billion euros is held by overseas investors such as insurers, sovereign wealth funds and hedge funds, Open Europe said.

The ECB has purchased about 36 billion euros of Greek debt since 2010, according to a Jan. 6 report by Laurent Fransolet, head of fixed income strategy at Barclays Capital in London.

Trichet, who was succeeded by Mario Draghi in November, repeatedly said he was opposed to any bond restructuring that forces investors to accept haircuts. ECB council member Athanasios Orphanides last week called in a Financial Times column for euro-area leaders to drop haircuts to convince markets it’s safe to invest in the region again.

‘Free Ride’

Losses from the ECB’s holdings of Greek debt could require it to raise new capital from its euro-zone member central banks. Niels Buenemann, a spokesman for the ECB, declined to comment.

Hedge funds shouldn’t swap their Greek bonds for new debt as long as the ECB refuses to do so itself because it’s legally difficult for a sovereign to default on payments to one holder while providing full payment to another, said Andreas Koutras, an analyst at InTouch Capital Markets Ltd. in London. Funds stand a good chance of getting paid out at face value, especially on debt maturing in coming months, should the ECB decline to take part in any exchange, he said.

“If the ECB is out, then for sure you should try to free ride on the back of the ECB,” Koutras said. “You’d be stupid to actually participate if the ECB does not.”

The first test of that trade is in March, when about 14.4 billion euros of debt matures. Government bonds redeemable on March 20 fell to a 52-week low of about 40 cents on the euro on Nov. 29, according to data compiled by Bloomberg. The bonds rose to 49 cents on Dec. 19. It traded at about 44 cents as of yesterday.

Collective Action Clauses

Trun-Tin Nguyen, a hedge fund manager at TTN NG in Zurich, said he’s been buying the bond on the expectation that policy makers will fail to reach an agreement before March.

“The bet is that either way, they will repay this one,” Nguyen said in an interview. “Before March, no solution should be achieved, whether it’s a haircut or a default.”

Officials may include collective actions clauses in any agreement, which would blur the voluntary nature of the swap, said a person with direct knowledge of the negotiations. Such a clause would give Greece’s lenders the right to impose the exchange on all holders if a majority of holders agree to it.

Policy makers expect the clause would push more investors, including hedge funds, to agree to the swap, said the person, who declined to be identified because the negotiations are private. Inserting the clause wouldn’t be a credit event, while a decision by Greece to act on it would probably trigger the CDS, the person said.

Still, CDS prices show investors are wagering that Greece will default and that swaps will be triggered. Contracts insuring against a default within the next five years have more than doubled to 7,819 basis points since October, when officials announced the debt swap.

To contact the reporters on this story: Jesse Westbrook in London at jwestbrook1@bloomberg.net; Julie Cruz in Dusseldorf via jcruz6@bloomberg.net