Greek Bonds Now Defaulted, Also Extra Attractive

Greek Bonds Now Defaulted, Also Extra Attractive

You can see why no one likes rating agencies. It’s not exactly a surprise to anyone that Greece’s debt situation is Not Good, so the fact that S&P just downgraded Greece to selective default is (1) not particularly helpful to anyone attempting to make an investment decision re: Greek bonds and (2) not particularly helpful to anyone else either.

That said, I admire S&P’s role as a stickler for the rules of a game that it invented and no one else is playing. Greece is conducting an essentially non-coercive exchange for its bonds at above their all-time high prices. Is that a “default”? Well, for what purposes? Legally, mostly no. For CDS, no. But for S&P, yes. (Yes, it is.) They’re paying off their debt for less than par, so default it is. And since those are the rules, S&P must pointlessly note that Greece is in selective default.1

Nobody else seems to care much. What do you make of this?

It’s just two days before the books close on a plan to reduce Greece’s debt load by having the country purchase its deeply discounted bonds from banks and investors. But bankers close to the transaction are voicing concerns that hedge funds might “blow up the deal” by holding out for a higher price. … [N]umerous hedge funds — many of which scooped up Greek bonds in the mid-teens this summer and are now sitting on fat profits — are telling Greece that they may not participate in the buyback. Instead, they are betting that the participation of Greek banks and short-term investors looking for a quick profit will be enough to get the deal done. In theory, the strategy would allow the hedge funds to cash out at prices of 40 cents and beyond when bonds rally in the aftermath.

What theory is that? Is it a theory expressed in price?2 In my simplistic mind, when people think that a tender is priced too low and they’ll get a better deal after it expires, they should be buying bonds to profit when the price goes up. But Greek bonds are trading sort of in the middle of the range of prices that Greece is offering, which in a Dutch auction is perhaps most reasonably interpreted as meaning not that investors think the top end of the range is too low, but rather that the auction will in fact end up somewhere within the range. And they’ve come down a bit off their post-announcement-of-distressed-exchange euphoric high:

If you could buy the Greek 10-year today at 38.285, and sell it on Friday at 40.1, I guess you would, no?

Or maybe that’s all wrong! Given various pockets of holdings, and the need to probability-weight any payoff, it’s hard to reason from a market price. Maybe the bonds are down because the minority of people who are actually trading bonds think that there’s enough supply locked away at mean holdout hedge funds to make the exchange fail; if the exchange fails, I’m guessing, nobody will be cashing out at prices of 40 cents and beyond.3 Or maybe they’re just down because of the S&P downgrade.

Concerns Mount That Investors Might Balk at Debt Buyback in Greece [DealBook]
Greece Downgraded to ‘Selective Default’ by S&P [CNBC]
You’re in selective default (again), S&P tells Greece [FTAV]

1. So: was Greece in selective default on S&P’s criteria on Monday? If not, why not? If so, why wait ’til today for the downgrade? Is there a complication I’m not aware of?

2. Relevant fact:

Also relevant fact:

3. Tangentially related: is it not a little odd that Oshkosh stock fell ~4% yesterday on news that ~70% of shareholders3a wanted Carl Icahn to go away and stop pestering them? If you think that the board’s plan for shareholders is better than Icahn’s cash tender, shouldn’t sending him packing increase value? If you think it’s worse, shouldn’t you have tendered into his no-strings-attached offer? What does this tell you about shareholders’ demand curves? What do Greek bondholders’ demand curves look like? Etc.

3a. He got 22% in his tender and owned another 8%, so 70% didn’t tender.


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