
Hedge fund eyes 35 pct return from Greek bonds buy |
Date: Friday, June 29, 2012
Author: Laurence Fletcher, Reuters
London-based hedge fund firm Adelante Asset Management has bought a position
in the cut-price bonds of debt-laden
Greece, betting that efforts by European politicians to restructure its debt
mountain will provide a short-term boost to bond prices. The firm, which specialises in emerging markets debt, bought a basket of
bonds at 12.5 cents shortly before Greek elections this month, won by a
conservative-led government promising to negotiate softer terms on its tough
international bailout. Adelante CEO Julian Adams told Reuters the firm hopes to sell the position,
which accounts for 2 percent of its portfolio, at 16 or 17 cents, which would
produce a return of roughly 35 percent. "We think they (the politicians) will cut a deal in the short term. It's a
tactical position. As the bonds appreciate we'll take profits," he said on
Thursday. Bets by hedge funds, which are often secretive about their trading positions,
on Greek bonds have proved highly controversial with many European politicians
in the past. Last month the country made a last-minute about-face and paid bondholders who
rejected an earlier debt exchange, yielding hefty profits for hedge funds who
bought the debt at a discount. Adams said that rather than buying individual maturities, which can be less
liquid, his position is in an equally-weighted basket of 20 bonds of different maturities, ranging from Greece's 2023 bonds
to its 2042 bonds. A Greek bond maturing in 2042 is currently trading at around 13.5 cents,
Thomson Reuters data shows. Greece, where Europe's debt crisis began, went through the biggest sovereign
debt restructuring in history in March, slashing its debt mountain by around 100
billion euros, or close to a third. But its new bonds still trade at distressed, default levels and remain rated
well below investment grade, preventing most conservative mainstream investors
from buying them, although a number of hedge funds have taken the plunge. Ten-year Greek bonds have fallen 30.5 percent in total return terms since the
start of the year, according to Thomson Reuters data, making them one of the
worst-performing major bond markets. However, Adams said historical precedents in emerging markets mean the bonds
should be worth more than current prices. "Fourteen cents (approximately the current price) is way below recovery value
in any emerging market debt scenario. The next debt reduction will inevitably
come for the official sector," he said. "After the Argentinian debt default, bonds initially traded at 30 cents,
though they drifted. Once they were restructured, the recovery rate was 45 cents
on the dollar. Ecuador did a buyback at 35 cents in the dollar." Euro zone leaders agreed on Friday to take emergency action to bring down
Italy's and Spain's spiralling borrowing costs and to create a single
supervisory body for
euro zone banks by the end of this year. Adams added that the legal terms of the bonds means the holder would be paid
out in euros, rather than a new currency, should Greece exit the euro.
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