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. [Reuters]