As Greece readies for its next foray into international bond markets, it will be hoping to draw more big-name, mainstream asset managers rather than the hedge funds who have been its main clients in recent years.
Since coming off life-support in 2018, Greece has been trying to leave a nine-year debt crisis behind. It applied earlier this month to repay early 3.7 billion euros of high-interest debt it owes the International Monetary Fund, replacing it with cheaper market-based borrowing.
It sold two new bonds in January and March and plans to return to the market by June.
But to maintain market access, Greece will need long-horizon investors such as BlackRock and Amundi. And a major barrier looms here – a credit rating that’s deep in junk territory means Greek debt is excluded from major indexes that global asset-management firms use as benchmarks.
There are signs, though, that recent ratings upgrades and an improving economy are starting to put Greek bonds back on the radar of big investors.
“We have been investing in Greece for about a year now, and see value in Greek government bonds as well as covered bonds issued by Greek banks,” said Iain Stealey, international CIO for JP Morgan Asset Management, which manages $369 billion worth of assets.
“There probably are still issues for Greece in the long term, but a majority of the debt is on the public side, which gives us comfort,” he said.
Just 60 billion euros of a total of roughly 350 billion euros of Greek debt is in free float. The rest held by official lenders such as the European Union and IMF.
Indeed, the latest bond deals suggest the investor profile for the former eurozone pariah is changing.
Real-money investors comprised less than 30 percent of the buyers when Greece tested markets with a new issue in 2014. Hedge funds bought almost 50 percent, according to the Greek debt management agency.
But in this year’s five- and 10-year deals, hedge funds represented only 11 percent of buyers. Real money took almost 70 percent.
Greece does not need to sell bonds until 2021, thanks to a 27 billion-euro buffer it has built up. But new issuance will allow Athens to replace IMF loans, where interest rates are up to 5.1 percent, with cheaper market financing – it paid less than 4 percent earlier this year to raise five- and 10-year cash.
Expanding its bond market is also considered a crucial step for Greece’s post-crisis rehabilitation.
“To attract a new wave of investors, Greece needs to build up its markets – you need access for regular issuance across different maturities,” said Lee Cumbes, head of public sector debt for Europe, the Middle East and Africa at Barclays.
Another bond sale is an opportunity to test whether Greece can get more funding from longer-horizon investors, reducing reliance on hedge funds, who are often blamed for stoking volatility by flitting in and out of markets, flipping newly bought bonds for a quick profit.
Greece is on a path trodden not long ago by previously bailed-out states such as Portugal and Ireland, but its rehabilitation may be slower.
First, while the economy is recovering, the nine-year crisis shrank it by a quarter. Unemployment is still almost 20 percent and debt, at 181 percent of gross domestic product, is the highest in the eurozone.
Second, Portugal spent five years climbing back to the investment-grade rating it lost in 2012. Greece, downgraded in 2010 to junk, will take a few years yet.
To enter the Markit eurozone index, which has a market value of 6.4 trillion euros, Greece needs at least an average BBB rating.
Still, it’s moving in the right direction. S&P just affirmed Greece at B+ with a positive outlook.
Meanwhile, asset managers can invest in Greek bonds, using funds that are not constrained by ratings criteria. BlackRock, for instance, holds small positions in Greek bonds, in its more aggressive unconstrained funds.
“Greece is one of those countries which, relative to three years ago, has made a lot of progress,” said Michael Krautzberger, head of BlackRock’s pan-European fixed income team.
Amundi, Europe’s biggest fund, with 1.425 trillion euros of assets, maintains a small position around the five-year maturity, said Eric Brard, head of fixed income.
“Greece’s funding position for the next three years or so looks quite comfortable, but over a 10-year horizon, we are more cautious,” he said.
Brard bought Greece’s new 10-year bond in a bet on near-term outperformance but has since sold the position for a profit. The yield on that bond has fallen 70 basis points since it was issued.
Greece might take heart from this month’s successful bond sale by neighbouring Cyprus, which was also bailed out in 2013 and has since regained investment grade.
Mark Dowding, a senior portfolio manager at BlueBay Asset Management, said that more investors would come as Greece’s ratings rose.
“And you start to extrapolate a path that could eventually lead towards investment grade, this encourages more real-money participation in bond deals.”