Hedge funds hold out for more from Greece

Date: Thursday, December 6, 2012
Author: Tommy Wilkes and Laurence Fletcher, Reuters

Hedge funds are preparing to resist Greece's attempt to cut its debt by holding out against a government bond buyback in the hope of bigger gains further down the line.

Greece had to offer a higher price than expected at a 10 billion euro buyback on Monday after hedge funds buying bonds pushed prices higher.

Resisting the urge to bank a quick profit, hedge funds will rely on the fact many bondholders will tender their holdings in the buyback. That will leave Greece with less debt, underpinning the value of what remains.

Some managers are now convinced that international lenders will do whatever it takes to keep Greece in the euro, improving the chances of payouts to bondholders.

Hans Humes, chief investment officer of New York-based Greylock Capital, said he planned to hold onto shorter-dated bonds, tender his long-dated Greek bonds in the buyback and then buy more shorter-dated debt, keeping the size of his positions in the country's debt about the same.

"Where else are you going to get such a great yield in the short end?" he said. "There is nothing else as good as this from a risk-reward perspective in Europe right now.

"They are well on their way to managing the (economic) situation. After this transaction, I think Greece is going to have a lot more people looking at (buying) their bonds."

Others said the buyback had put a floor under the price and limited the downside while still offering potential future gains.

"We may tender at the higher end of the range but have not decided yet," said Julian Adams, CEO at Adelante Asset Management. "(There) does not seem to be much downside in not participating."

Hedge fund holdouts are unlikely to prevent the buyback from getting over the line, according to Nomura analysis, because of participation from banks. Hedge funds were estimated to hold up to 25 billion euros out of the total 63 billion in private creditors' hands.

ARGENTINE PRECEDENT?

Funds are wary of disclosing whether or not they will accept the buyback for fear of weakening their positions. Many will be hoping others will take up the offer, increasing the potential payout for themselves.

Those that do hold out may take comfort from Greece's about-face in May when it paid in full the holders of one bond who rejected debt exchange in February. The government had said at the time of the offer in March that anyone who rejected it would get nothing.

Funds will also be buoyed by legal safeguards they now enjoy as bondholders. Under Greece's 206 billion euro restructuring in March, old Greek law bonds were traded in for new bonds issued under English law, which offers investors more protections.

Managers are also getting excited about court rulings in the long-running legal battle between Argentina and holdout creditors, including U.S. hedge fund Elliott Management, which have said Argentina must pay holders of restructured bonds and holdouts simultaneously.

"I think you will look back in two or three years' time on this crisis and the Argentine U.S. court decision will prove to be a very, very interesting juncture," said Lee Robinson, founder of Altana Wealth. "It potentially affects many countries and trillions of dollars of bonds (if they default)."

Robinson, who bought Greek bonds due 2042 at 20 percent of face value, would not say whether he will take part in the buyback. The Monaco-based manager said: "All the English law bonds have been paid at par so far. It is very difficult to bully bondholders under English law."

DUTCH AUCTION

Greece has not specified the value of bonds it hopes to buy back, but if it spends the full 10 billion euros at an average price of 34 percent it can buy 28 billion euros worth, Nomura economist Dimitris Drakopoulos said in a note.

With Greek, Cypriot and EU state banks almost certain to tender close to 20 billion euros of their holdings, getting hedge funds to tender another 8 billion at the higher prices "seems a reasonable and likely outcome", Drakopoulos said.

Many of the hedge funds built up positions when Greek bonds were as low as 11 cents on the euro after the national election in June when the country looked close to exiting the euro.

Those worries have since receded, sparking a rally in the bonds and netting funds who got in early a 200 percent gain should they participate in the buyback.

Funds refusing to participate in the buyback are betting that the smaller amount of private debt left over will rise in price and they are less likely to face future losses.

After the buyback, around four-fifths of the country's debt will be held by the official sector, and Greece will have the longest duration bonds globally at very low interest rates, reducing refinancing risks, one hedge fund manager said.

"One could say that as the PSI (private sector involvement) halves, the small group left standing could be paid out on better terms," Sohail Malik, head of special situations at asset manager ECM said.

"But the worst case is that because the PSI is so small, policymakers decide to haircut you completely and tell you that '20 cents is your offer, take it or leave it' because you are not a significant holder."