Greece reportedly considering issuing century bond
One of the options Greece is looking at is offering a 100-year bond in return for outstanding short-term debt, said a banker at one of the institutions advising the country who said he saw the plans being studied.
BNP Paribas, Deutsche Bank and HSBC are advising Greece on its current debt restructuring exercise, alongside Lazard.
Officials at other banks on the deal would not confirm that the new option, which envisages a structure similar to Brady bonds, is being looked at. One said the main focus was still on the current proposals going ahead without amendments.
However, strong demand for a century bond offered a few weeks ago by Mexico suggested a similar plan could make sense for Greece.
“The financing costs of Greece are going to be horrible, but more importantly such a move avoids default. It’s more about surviving rather than doing what is right from a long-term financing point of view,» said Tim Jagger, Singapore-based RBS credit strategist.
Credit protection markets are signalling a 94 percent probability that Greece will default within five years.
Before Greece’s second 109 billion-euro bailout was agreed on July 21, some euro zone officials had urged the country to try and swap existing debt for bonds with maturities of up to 40 years.
That was amended to a proposal to swap or roll over 135 billion euros, or 90 percent, of outstanding debt maturing before 2020 into new bonds backed by Triple A issuers with longer maturities of up to 30 years.
It was expected that the move would deliver an effective 21 percent haircut to the principal value of bonds holdings. Private-sector bondholders would also be able to participate in a cash buyback at a steeper discount, now mooted at 50 percent. Some 20 billion euros was earmarked for this purpose.
The long-duration of a 100-year bond would offer investors a security that would be less volatile if interest rates rise. But it would also mean larger swings in nominal face value for smaller yield moves, a feature that would make a century bond attractive for hedge funds.
The likely high liquidity of a theoretical 100-year bond from Greece would also make it desirable.
“It could be a low coupon but massively sub-par bond so you get the par effect in yield terms. The CDS trades on an upfront basis and the massively inverted curve indicates distress in the near term and lower risk for longer-term credit,» Jagger said.
A 100-year bond to restructure Greece’s debt would have the advantage of sending a strong signal to the market that Greece’s refinancing problems had been put away for a very long time.
The banker said that the 100-year bond being considered would be structured like the Brady bonds used to rescue a number of Latin American countries which defaulted on commercial bank loans in the 1980s.
Most of the bonds that resulted from the Brady plan had a 30-year tenor and were partly backed by U.S. Treasury bonds. The Brady plan generated over $160 billion in bonds, which made these securities highly liquid.
While this is just another option being studied, bankers believe the current plan is the preferred path. Bondholders were invited to tell their domestic regulators whether they planned to accept the currently tabled exchange offer by September 9.
The Greek finance ministry has not released the results of this exercise but banking sources close to the situation have indicated that investors holding only 70 percent of the identified bonds had definitely said they would participate. Greece has reserved the right not to proceed unless 90 percent of bondholders by value accept the offer.
However, one banking source close to situation said the plan was now likely to proceed under the current terms even if the 90-percent participation rate could not be reached.
The offer is likely to be published in October once the euro zone authorities, the IMF and the ECB have decided whether to disburse the next tranche of the original bailout and all 17 euro zone parliaments have ratified the enhancements to the EFSF rescue fund.
Finland backed the changes on Wednesday, and Germany followed suit on Thursday. The last to vote, Slovakia, is not due to give its verdict until mid-October.
[Reuters]
