the greek psi 10233
TRANSCRIPT
March 2012
Greek PSI
At the Dawn of the Biggest Debt Liability Management Exercise in History...
Ioannis SokosInterest Rate Strategist
2
Contents
1. Greek Debt and the PSI Pool
2. Participation and Valuation of the PSI
3. 130bn Bailout Package & Greek Political Landscape
4. Tendering and Voting Mechanics
5. “New Bonds” – Legal Points
6. Implications of the PSI on Greek CDS
3
1. Greek Debt Vs The PSI Pool
4
From July 21st to February 21st & Beyond…
� 2011, July 21st: First attempt for a restructuring of Greek bonds with NPV loss of 21%, main benefit was the extension of maturities of the existing bonds (rescheduling), 4 available options were offered to investors with equal NPV loss of 21%, GGB Mar-12 was trading at 76% at that point. [We knew the method but we didn’t know the target]
� 2011, October 26th: The July 21st deal was not adequate anymore since Greek macroeconomic projections have deteriorated further and Greek debt was on an unsustainable path, agreement on 50% face value haircut, targeting a 120% Debt/GDP in 2020, EUR 130bn of additional financing to Greece, GGB Mar-12 was at 53%. [We knew the target but we didn’t know the method]
� 2012, February 21st: Greek macroeconomic projections have deteriorated even further, face value haircut increases to 53.5%, NPV loss of around 75% for investors, voluntary PSI targeting 95% participation, some degree of OSI (official sector involvement) via lower interest on EU bilateral loans and distribution of ECB & NCBs profits on SMP’s holdings of GGBs until 2020, GGB Mar-12 was trading at 33%.
The Exchange Offer
� PSI: For every 1000 euros face value of existing GGBs investors will get:
� 150 euros of EFSF 1y & 2y bonds (PSI Payment Notes, 50%/50% split)
� 315 euros of new Greek Bonds issued by Greece� These bonds will form a bundle of 20 different bullet bonds
maturing from 2023 to 2042 with a step-up coupon structure (2% up to 2015, 3% from 2016-2020. 3.65% in 2021 and 4.3% thereafter, and special features like the Co-Financing Agreement.
� 315 euros of notional of GDP-linked securities (capped payoff of 1%, start paying from 2015 onwards)
� They will also receive any accrued interest on their existing GGBs holdings in the form of EFSF 6m T-bills.
� Face value haircut of 53.5% and estimated NPV haircut of 74.2%(ignoring GDP warrants which can add a maximum NPV contribution of 1.78% if they pay maximum amount each and every year) at a 12% discount rate.
PSI Timeline
Fri 24 Feb PSI Public Offer
Mon 27 Feb German Parliament approved second Greek programme
Wed 29 Feb Finnish Parliament approved second Greek programme
Thu 01 Mar Eurogroup Meeting duscussing PSI progress
Fri 02 Mar EU Heads of States Meeting
Wed 07 Mar Revocation deadline for the PSI
Thu 08 Mar Expiration deadline for the PSI
Fri 09 Mar Results Announcement
Mon 12 Mar Settlement for Greek law bonds
Tue 13 Mar IMF Board Meeting to decide on contribution
Tue 20 Mar Redemption of the Mar 2012 GGB - Held by ECB
27 - 29 Mar Foreign Law Bonds - Bondholder Meetings
Wed 11 Apr Settlement Date for Foreign Law bonds
Sun 29 Apr Greek Elections ?
7 Long Months…
5
Greek Debt Profile – Basic Components: Official Vs Private Holdings
Cumulative: 20 29 38 53 65 73 78 88 94 100 102 108 110
Tranches: 20 9 9 15 12 8 5 10 6 6 2 6 2
May-10 Sep-10 Dec-10 Mar-11 Jun-11 Dec-11 Feb-12 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
EU/IMF Aid Disbursements Profile
EUR 37bn Remaining
Greek Debt Composition (1)
(1) http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/11/e9/47/11e94797847da1484fb1e58e1b7d2bfa295ef500/application/pdf/Bulletin_No64.pdf
� EUR 237bn of GGBs (BBG: GGB Govt)
� EUR 18bn of International GGBs (BBG: Greece Govt)
� EUR 4bn of Hellenic Railways Bonds (BBG: HELNRR Govt)
� EUR 16bn of T-bills (BBG: GTB Govt)
� EUR 73bn of EU/IMF loans disbursed from the EUR 110bn bailout package.
� EUR 19bn of Other Loans
� TOTAL: EUR 368bn of debt, or 169% of GDP in the end of 2011
Greek Debt Before & After PSI
� Debt in private sector hands will be replaced by debt in official sector hands, including EU/IMF, EFSF loans, and ECB’s holdings.
� This means that it will be impossible to have a second restructuring without substantial official sector involvement. The New GGBs will be only 18% of Greek debt in 2015.
� EU/IMF tranches are the most “senior” ones across all Greek debt. Any potential holdout bonds will be the most “junior”.
Greek Debt Composition
55.9%
15.3%
4.1%
19.8%
4.9%
Greek Bonds (ex-SMP) SMP's GGBs
T-Bills EU/IMF Loans
Other Loans
206
56.5
73
0
15 18
62
27.1
64
167
618
0
50
100
150
200
250
GGBs ECB's GGBs EU/IMF EFSF Loans T-Bills Other Loans
Before PSI - Feb 2012
1/1/2015 - End of ProgrammeFrom 56%of the debt ahead of
PSI to 18% of the debt in 2015
6
The 5 Pools of Bonds of the Greek PSI
Bonds Category Outstanding Amount % of Total Exchange Offer Consent Solicitation Aggregate CACs
Greek Law "Eligible Titles" 177.31 86.2% Yes Yes Yes
Foreign Law Gov Bonds 16.87 8.2% Yes Yes No
Foreign Law Guaranteed 2.97 1.4% Yes Yes No
Exchange Designated Securities 7.89 3.8% Yes No No
CHF Bond 0.54 0.3% No Yes No
TOTAL PSI POOL: 205.58 100.0%
Greek PSI Pool of Bonds
86.2%
8.2%1.4% 3.8% 0.3%
Greek Law "Eligible Titles" Foreign Law Gov Bonds
Foreign Law Guaranteed Exchange Designated Securities
CHF Bond
� Because of the aggregate CACs in the Greek Law “Eligible Titles”and the requirements of a 50% quorum and 2/3 majority voting, the minimum possible participation in Greek Law bonds that couldactivate the CACs is 59.1bn or 28.75% of the total PSI pool.
� This means that with a 28.75% participation Greece could actually amend the terms of 87% of the overall outstanding amount.
� Our view is that the Greek CACs will be activated, thus leading to a 86.2% minimum participation for the whole PSI.
� Collective Action Clauses on foreign law bonds apply on a bond
by bond basis. There will definitely be some blocking positions and it is difficult to assess the potential participation from this pool of bonds.
� Over the last few days, there has been some trading activity on foreign law bonds, and this change of hands in the last hours ahead of the PSI could cost in terms of participation.
� The Greek Law “eligible titles” is the only one of the 5 categories that includes aggregate CACs. Exchange designated securities (guaranteed and physical securities) require no consent solicitation while in the CHF bond there is no exchange invitation.
� With respect to the remaining 14%, there are holders of foreign law bonds (Greek banks, European banks, part of IIF committee) that have shown their commitment of participating in the PSI. However, there will be also blocking states on some foreign law bonds which will create hold-out investors. Whether participants will be enough to reach the 90% threshold is uncertain at this point. Greece is in a rush to complete at least the Greek Law bonds exchange (including the March 2012) and then it can deal separately with the foreign law bonds holdouts.
7
OSI: Treatment of ECB’s & NCB’s GGBs Holdings
� ECB’s SMP holdings along with NCBs’ GGBs holdings received special treatment so that they can escape the consequences from the activation of CACs on Greek law bonds.
� They exchanged their holdings with new Greek bonds, identical in all payment and maturity terms, BUT with different ISINs and different issuance date since all of these bonds were created on Feb 20th 2012.
� Thus, they are not eligible for CACs, given that one of the four basic terms for eligibility in Greek law CACs is that the bonds must have been issued no later than 31/12/2011.
� Greece will have to repay at PAR EUR 4.67bn of March 20th 2012 bonds that ECB is holding. The difference of PAR – Purchase price and the coupon will be re-distributed by ECB to NCBs in order to be used for the Greek programme. Still lacking details on the specific profit distribution mechanism.
� Following question on ISDA website whether ECB’s bond swap constitutes a credit event, ISDA DC decided on 1st of March that it does not.
8.3
10.0
6.7
2.3
5.3
1.9
5.8
1.4 1.3 1.3
0.1
0.9
0.1 0.1
11.1
-
2
4
6
8
10
12
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
Billions
20/03/2012 4,669,387,000
18/05/2012 3,334,299,000
20/08/2012 3,133,923,000
20/02/2013 443,278,000
20/05/2013 4,588,895,000
20/05/2013 1,004,865,627
03/07/2013 84,300,000
20/08/2013 2,170,000,000
11/01/2014 1,853,162,913
20/05/2014 4,154,750,000
01/07/2014 30,000,000
20/08/2014 3,958,820,000
20/07/2015 3,491,380,000
20/08/2015 3,188,300,000
20/07/2016 2,307,593,000
04/04/2017 48,000,000
20/04/2017 1,353,800,000
20/07/2017 3,877,550,000
20/07/2018 1,856,380,000
19/07/2019 3,752,450,000
22/10/2019 2,016,982,997
19/06/2020 1,366,350,000
22/10/2022 1,306,698,000
20/03/2024 1,305,870,000
25/07/2025 80,296,800
20/03/2026 936,706,000
25/07/2030 94,512,350
20/09/2037 132,800,000
Total 56,541,349,687
ECB's & NCB's HoldingsECB’s & NCBs’ GGBs Holdings
Greece still needs to find EUR 4.7bn to repay
the ECB at PAR for the Mar-2012 bond
redemption. Then according to the OSI
guidelines, ECB via NCBs may re-distribute the
profit (PAR-purchase price) to Greece for debt
sustainability purposes. Therefore the
EFSF/IMF facility will need to disburse CASH to
Greece by March 20th the latest.
8
2. Participation & Valuation of PSI
9
Minimum Participation Conditions (1/2)
� P > 90% (Minimum Participation Condition): The republic WILL COMPLETE the exchange of validly tendered designated securities if more than 90% has been tendered for exchange pursuant to the invitation and the parallel invitations by the expiration deadline (no reference to CACs at this point).
� 75% < P < 90% : The republic, in consultation with its official sector creditors, reserves the right to waive the minimum participation condition and proceed to exchange designated securities tendered pursuant to the invitation (still no reference to CACs).
� CACs Activation: IF the republic has received tenders of designated securities and has obtained consents to modify designated securities in the invitation THAT upon acceptance would result in at least 90% of the aggregate principal amount outstanding of the overall debt becoming either EXCHANGED upon acceptance by the republic or SUBJECT TO the proposed amendments, the republic, in consultation with its official sector creditors, INTENDS to put into effect the proposed amendments to all the eligible titles, as applicable.
� P < 75% : If less than 75% has been validly tendered for exchange and the republic has not obtained consents in the consent solicitation representing at least 75% of the aggregate principal amount, the republic WILL NOT
PROCEED with any part of the transactions.
� To activate the CACs on Greek law bonds you need a 50% quorum and 2/3 majority, i.e. a minimum of EUR 59.1bn or 28.7% of the total PSI pool. This can be enough to put into place the proposed amendments to the remaining EUR 118.2bn of Greek law bonds, reaching a 86.2% participation.
� However this is not enough in order to reach the above 90% overall participation. From the remaining EUR 28.27bn Greek bonds you need another EUR 7.8bn (28% of total non-Greek law) participation (tendered in the invitation or after proposed amendments are put in place).
� Still, even if you manage to get a 90% participation after the proposed amendments have been put in place, there is a 5% gap with the assumed participation of 95% in the IMF DSA. We believe that the 95% participation is the strictest threshold of all given IMF’s insistence for no more than 120% debt/GDP in 2020.
� This means that there are no provisions in the programme for this extra 5% of holdouts. If Greece chooses to pay those bonds at PAR at their maturity, the EUR 130bn might not be enough to finance the country’s funding needs until the end of the programme period.
10
Minimum Participation Conditions (2/2)
The Republic may, in its sole discretion, extend, re-open, amend, waive any condition of or terminate the invitation or modify any settlement date at any time (subject to applicable law and as provided in this invitation memorandum) with respect to one or more series of designated securities. Details of any such extension, re-opening, amendment, waiver, termination or modification will be announced as provided in this invitation memorandum as soon as reasonably practicable after the relevant decision is made. If the Republic terminates the invitation with respect to any series of designated securities, designated securities of that series in respect of which participation instructions have been submitted will be released from any blocking and will no longer be subject to the invitation. The Republic shall have complete discretion in determining whether to terminate the invitation for any series of designated securities and any such termination will have no consequence with respect to the invitation for all other series of designated securities.
Greece Can Change Everything In the PSI Invitation In its Own Discretion
11
Valuation of the PSI
Estimating the NPV of the PSI Deal Cash Flows Relating to New Greek Bonds
Estimating the NPV of the New Greek Bonds� NPV estimation, once the projected cash flows are
known, solely depends on the selection of a discount rate.
� The PSI deal has an NPV of 25.8% at a 12% discount rate which becomes 30% under a 9% discount rate (ignoring GDP-linked securities).
� The 30y new Greek bonds reach NPV of 21.4% under 15% discount rate and 16.8% under 18% discount rate and are likely to be the cheapest to deliver in an upcoming CDS auction.
� The repayment profile of the bundle of 20 new Greek bonds is equivalent to an amortizing 30y bond.
0
1
2
3
4
5
6
7
8
9
10
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Amortizing Notional
Coupon Payments
36.9
34.231.9
30.028.4
27.025.8
24.8 23.9 23.1 22.4 21.8 21.3 20.9 20.421.9
19.216.9
15.013.4
12.010.8
9.8 8.9 8.1 7.4 6.8 6.3 5.9 5.4
0
5
10
15
20
25
30
35
40
45
50
6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
Greek Discounting Rate (flat)
NP
V
Total NPV for Investors
EFSF 2y Notes
NPV of new PSI Bonds
NPV Estimates of New Greek Bonds for Various Discount Rates
€ 0
€ 5
€ 10
€ 15
€ 20
€ 25
€ 30
€ 35
€ 40
€ 45
€ 50
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
12% 15%
18% 20%
12
Greek Law Bonds – In Search for Value…
� The outlier GGB Apr-13 is not PSI eligible and this is why it is trading at a premium.
� The average price of Greek law GGBs is 21.40 which corresponds to a discount rate of 17-18%.
� Even for a discount rate of 15%, there are GGBs in the long-end of the curve which trade below the expected NPV of the PSI deal. Implementation risks may form part of this price discount.
� 5y-10y Portuguese bonds trade at around 15% at the moment, and this can be considered as a floor for post-PSI trading of the new Greek bonds. It’s hard to believe Greece could trade tighter than Portugal (but Portugal could rally at some point).
Greek Law Bonds Prices Vs PSI NPV Estimates
Greek Law Bonds with Outstanding > EUR 1bn
15
20
25
30
35
40
20/0
3/20
1218
/05/
2012
20/0
8/20
12
22/1
2/20
1220
/02/
2013
19/0
4/20
1320
/05/
2013
20/0
5/20
13
20/0
8/20
1322
/12/
2013
11/0
1/20
1420
/05/
2014
21/0
5/20
14
10/0
8/20
1420
/08/
2014
04/0
2/20
1520
/07/
2015
20/0
8/20
15
20/0
7/20
1604
/04/
2017
20/0
4/20
1720
/07/
2017
20/0
7/20
18
19/0
7/20
1922
/10/
2019
19/0
6/20
2022
/10/
2022
20/0
3/20
24
25/0
7/20
2520
/03/
2026
25/0
7/20
3020
/09/
2037
20/0
9/20
40
Last Closing Price (BBG)
r = 15%
r = 12%
r=9%
13
Greek Foreign Law Bonds – In Search for Value…
� The May 15th 2012 bond is currently trading at around 80 as the market believes that this bond will be paid at PAR.
� Prices fall from 2013 onwards due to the embedded Greek post-PSI default risk, but are above the Greek law bonds.
� The average price of all foreign law bonds (for which BBG has a price) is 34.75, which corresponds to a discount rate of 6-7%. This is of course distorted by the very expensive May-2012 bond which is expected by the market to be paid at PAR.
� We don’t think it is right to assess the potential exit yield from the International Law bonds because not all of them are going to participate in the PSI (hold-outs) and thus they are not a fair proxy of the potential PSI package value.
� Out view is that there is a lot of uncertainty on whether holdout international bonds will be paid at PAR. Given that, we think that the 2012/13 international bonds are trading expensive given the risks. The holdout strategy is a very risky one given the narrow limits of available funding for Greece’ funding needs until the end of the programme.
Greek Foreign Law Bonds Prices Vs PSI NPV Estimates
International Law Greek Bonds for which we get a BBG Price
15
25
35
45
55
65
75
85
95
15/0
5/20
1225
/06/
2013
05/0
7/20
1314
/07/
2015
01/0
2/20
1608
/04/
2016
11/0
4/20
1622
/08/
2016
05/0
7/20
1811
/03/
2019
13/0
7/20
2007
/07/
2024
06/0
7/20
2514
/04/
2028
10/0
5/20
3417
/07/
2034
Last Closing Price (BBG)
r = 15%
r = 12%
r=9%
14
3. EUR 130bn Bailout Package & Greek Political Landscape
15
Package of EUR 130bn – Funding Needs & Sources
� Greece will receive a 2nd bailout package of EUR 130bn on top of the EUR 37bn (becomes EUR 34bn after step-out EU members) remainder of the 1st EU/IMF programme.
� This programme is supposed to fully finance Greece at least until the end of 2014. In 2015 Greece will have to either get a 3rd programme (conditional on hitting all performance targets) or borrow from the markets (very low probability) or default on its debt obligations and do a second restructuring.
� In the table below we explain how the EUR 130bn package will be spent, by analysing funding needs and sources up to the end of 2014.
PSI Sweeteners EFSF Bonds 30.0 Privatisations 12.0
Accrued Interest EFSF Bills 5.5 Original 110bn aid 34.0
Bank Recapitalisation 50.0 2nd Bailout Programme 130.0
Deficit 23.0 Total Funding Sources 176.0
GGBs Redemptions 29.4
EU/IMF Repayment 8.5
5% PSI Holdouts 10.3
T-bills Reduction 9.0
Others 6.5
Total Funding Needs 172.2
Up to end of 2014
Funding Needs Funding Sources
� This proves why Greece has no room at all to pay holdouts at PAR, beyond the 5% assumption in the IMF’s DSA. This provision is included in the funding needs already, assuming that most holdouts will be in the short-end of the curve. Also, an undershoot in Privatisations or overshoot in Deficit is very likely, thus implying even less room to pay holdouts at PAR.
� Whether or not Greece will receive a 3rd programme will depend on the implementation of the second one and on the Global Economic conditions prevailing at that time.
16
Greek Political Situation (1/2)
Parliamentary Seats (300)
Recent Polls – PASOK is below ND since Aug 2011
Main Parties & Leaders
� PASOK won the 2009 elections and obtained one of the strongest majorities in recent Greek political history of 160 seats.
� The austerity measures have led many PASOK MPs to express their disagreement and leave the party. PASOK’s majority has weakened substantially in line with its popularity in recent polls.
� ND has followed a hard opposition line, opposing the MTFS and the IMF memorandum. They support more spending cuts and less tax increases in order to boost the economy. They believe in renegotiating the terms of the MOU with Troika. They approved the latest austerity measures but with significant political casualties.
� The call of a referendum in November 2011 by PASOK’ Papandreou proved to be the move that marked the end of PASOK’s independent government.
� Since November, PASOK, ND & Laos formed a coalition government under Mr. Papademos who became PM. The three parties together had 253 seats. Only 199 MPs voted yes in the 2nd bailout programme. The sole purpose of the temporary coalition government is to approve the 2nd bailout programme, conduct the PSI and lead the country into elections.
� Laos left the coalition party on Sunday Feb 19th as it did not vote for the new round of austerity measures. PASOK and ND lost 22 MPs each and look much weaker in the parliament now. Laos lost 2 MPs who voted yes, leading to 63 independent MPs in the parliament, one more than ND’s MPs which is the leading party in the polls.
Party Ideology Leaders
Pasok Centre-Left PapandreouND Centre-Right Samaras
KKE Communist Papariga
Laos Right-Wing Karatzaferis
Syriza Left-Wing Tsipras
131
62
21
14
9
63
Pasok ND KKE
Laos Syriza Independent
0
10
20
30
40
50
60
Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12
PASOK ND
KKE LAOSSYRIZA
17
Greek Political Situation (2/2)
� One of the reasons explaining the harsh stance of EU leaders on Greece and the insistence for increased conditionality and surveillance is the rapidly changing political environment in Greece. This is uncharted territory for Greeks themselves as the two biggest political parties of PASOK and ND have governed Greece since the return of democracy in 1974, always obtaining very high shares in polls and elections. This time looks much different though. Three opinion polls that took place over the weekend of 18-19/2 came on time to validate this point. A coalition government will be the only available option while there is a mixture of left and right parties ready to enter the parliament with more seats than they ever had.
� We present the average outcome of these three polls according to which ND comes first with a 22.3% share, much lower than the above 30% share that it had ahead of the “yes” vote to the latest round of austerity measures. Samara’s turn in the last critical vote did cost him in the polls as he had to dismiss 22 MPs from the ND party. The second party in the polls appears to be the Democratic Lefts with 12.3%, a new political party formed in 2010 that takes advantage of the PASOK’s weakness and disapproval from the traditional centre-left voters. PASOK comes third with 11% share. This share could increase in elections time, once the new leader of the party is elected in the coming weeks. Clearly the damage from the past two and a half years of governance is irreversible. A potential coalition with ND can’t be ruled out as these are the two main parties that embrace Greece as a part of the Eurozone. Two left parties follow with very high shares in the polls, the communist KKE with 10.6% and Syriza (coalition of the radical left) with 9%. The right-wing LAOS (ex-member of the coalition government) follows with 5.1%. Three smaller parties might be able to surpass the 3% limit and join the parliament, squeezing the available seats for the two biggest parties.
� In any case, it is of ultimate importance that the two biggest parties of PASOK and ND can form a coalition government together even though this is not the standard practice in Greek politics. However, at such critical times, sharing the European vision of Greece is an important enough reason to lead these two parties to form a coalition government. If this is not possible, it would be much more difficult to find an alternative ally for ND or a 3rd ally for the ND/PASOK alliance. In one of the polls that were published on Feb 19th, 68.3% of the sample said that a coalition government would be more suitable to tackle Greece’s problems at the current juncture.
� Pressure from EU for a continuation of Mr. Papademos coalition government or a technocrats’ government a la Monti will rise in the coming weeks. However, elections could work as a “relief valve” for the Greek society which is angry with the gap between the views expressed in the parliament and those in the streets. In the aforementioned polls, 55.8% prefer a balanced government between technocrats and politicians while 34% prefer a technocrats’ only government and only 7.7% prefer a politicians’ only government. This demonstrates the disapproval of the whole political system in Greece by the Greek people.
� The most likely elections’ date is the April 29th at the moment but this could change depending on the pressures from EU. In any case, any request for a written pledge by all political parties in Greece on the their commitment to the implementation of then new programme will be impossible to get as except for PASOK and ND most of the remaining parties use the anti-IMF line as their flagship to their electorates.
18
Escrow Account for Bailout Money – Debt servicing senior to primary deficit
� German Chancellor Angela Merkel and French President Nicolas Sarkozy proposed a separate escrow account for the bailout funds that will be disbursed to Greece. What does this mean? First of all let's explain how Greece spends the tranches it receives from the EU/IMF bailout package.
� 1) Primary deficit: Greece's revenues are still less than its expenditures, so it needs to borrow to cover the gap.
� 2) Interest-rate expenses: Greece's huge debt stock led to around EUR 15bn of debt-servicing costs in 2011. This includes both the coupon payments on GGBs and the interest paid on the EUR 73bn of EU/IMF bailout funds already disbursed. It becomes clear that the interest on the bailout funds will exceed the coupons on the new PSI bonds, which will have a total maximum outstanding of only EUR 70bn.
� 3) Redemptions: In 2011, we saw EUR 28bn of GGBs expiring. As Greece can't refinance its debt, it needs the EU/IMF tranches to repay it.
� 4) Other: These include settlement of arrears, deposits into the HFSF, the recognition of implicit or contingent liabilities and other special items.
� What Chancellor Merkel and President Sarkozy implied was that each disbursement to Greece should be split into two parts, one to fund debt repayments and one to fund the primary deficit. The part spent on debt repayment would be kept in a special escrow account from which investors would be paid directly. So, debt repayments would effectively become somehow “senior” to primary deficit funding.
� That would be very significant because it breaks the link between debt repayment and the quarterly reviews to which Greece has been subjected for the last 18 months. In the past, every time there was a review of the Greek programme, there was a lot of uncertainty in the market, because if Greece missed the targets, it might not receive the next tranche of its bailout fund and might default on its debt. This had important implications for other peripheral markets due to so-called contagion effects. This would no longer be the case, as the “default” would be replaced by "internal default".
� Creating less volatility and less tension in the system is certainly a desirable outcome. More than that, an escrow account would also reduce Greece's bargaining power, as it could no longer use the threat of default every quarter to put pressure on EU members to disburse the funds, even through it had not hit its fiscal performance targets. However, such a plan would have some significant limitations.
� First of all, Greece is expected to return to a primary surplus in 2012, and if this is not achieved because of the deepening recession, it should happen by 2013. What does this mean? That Greece will have to use its primary surplus to partly repay its debt obligations. However, if it is known that debt obligations will be repaid by the EU, it might fell under less pressure to achieve such a surplus, especially in an election year, for example.
� Secondly, in a scenario in which Greece misses its targets, it won’t be able to pay pensions and wages, then it is akin to a defaulted country that keeps creating debt without being able to use the proceeds in the way it wants. This of course will not be a sustainable situation.
� Overall, this plan could absorb some of the volatility and tension and reduce contagion to other countries, but only in the short term, i.e. for a few months, especially around the time of the quarterly reviews. Contagion does not only come from the bond market, but also defaulted economies. Social unrest, massive unemployment, aggressive wage cuts and the non-payment of pensions are also potential reasons for contagion.
� This proposed plan does not mean the EU will guarantee Greece's debt and repay it for ever, even if Greece defaults. It doesn't mean either that the EU will pay the 20 March redemption if talks on the PSI fail. Don't forget that the PSI is a prerequisite to the second bailout programme, and what Chancellor Merkel and President Sarkozy discussed is only related to the disbursement format of this second bailout programme, assuming that there is one. So, overall a nice volatility-smoothening tool for the coming months, but far from a guarantee for Greek bondholders.
19
4. Tendering and Voting Mechanisms
20
Tendering and voting mechanics
� 3 invitation memoranda for non-US persons
� “Designated Securities” (exchange offer and consent solicitation)
� “Exchange Designated Securities” (exchange offer only)
� Swiss bond (consent solicitation only)
� Exchange process
� Exchange of existing bonds for PSI consideration
� Exchange period open; due to end 9.00pm (CET) 8 Mar 2012
� Tendering also means voting ‘yes’ (if consent solicitation applies)
� Expected settlement date 12 Mar 2012
� Exchange and timetable at discretion of Greece
� Consent solicitation process
� Mechanism to amend terms of bonds to bind holdouts into exchange
� Requires voting threshold to be met to be effective
� Foreign law bonds on different timeline and handled on bond-by-bond basis
21
Tendering and voting mechanics
� Decision on whether and how to tender and/or vote is complex and should be made with legal and other professional advice
� Invitation memoranda sets out process for tendering/voting:
� Process depends on bond and personal circumstances of holding
� Holders through intermediaries likely to need chain of instructions
� Submitting instruction means making representations/undertakings
� Limited ability to revoke instructions
� Results in blocking of bonds in clearing system
� Paper process for securities not in clearing system
� References to securities held as Eurosystem collateral with central bank
� Ability to attend physical meetings on 27-29 Mar 2012 for foreign law bonds
� Contrast with PSI 1:
� No requirement to aggregate holdings at group level
� Possible to take different actions with respect to different bonds
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5. “New Bonds” – Legal Points
23
“New Bonds” – legal points
� Entitlement to €315 of New Bonds per €1,000 of existing debt exchanged
� Terms still being reviewed by the market
� English law
� Trustee structure
� Benefit of Co-Financing Agreement
� Links payments under New Bonds with payments under €30bn EFSF facility
� Common agent distributes payments on pro rata
� “Turnover” provisions if the EFSF or bondholders recover more than its/their share
� Extends to €30bn EFSF facility only, not all EFSF indebtedness
24
“New Bonds” – legal points
� Pari passu with “all unsecured and unsubordinated borrowed money obligations”
� Negative pledge but note “Relevant Indebtedness” nuance
� Events of Default include:
� Failure to pay interest (30 day grace period)
� Cross-default / cross-acceleration
� Relevant Indebtedness only
� $250m threshold
� EFSF €30bn facility agreement acceleration
� Sovereign debtor triggers
� Acceleration requires instruction by holders of 25% of principal outstanding of all New Bonds, although instruction can be rescinded by holders of 50%
� Waiver of sovereign immunity (but note limitations)
25
“New Bonds” – legal points
� Collective action clauses (all New Bonds treated as single series)
� Reserved matters
� Quorum: 66 2/3% of principal outstanding
� Vote: 75% of principal represented at meeting
� Non-reserved matters
� Quorum: 50% of principal outstanding
� Vote: 50% of principal represented at meeting
� Aggregate collective action clause for ‘cross-series’ matters also affecting other debt
� Affirmative vote of 75% of principal represented at series meetings
� Affirmative vote of 66 2/3% of principal represented at each series meeting
� Ability for vote to fail overall but apply to some of the relevant series
� Different requirements for written resolutions and adjourned meetings
� Provisions to exclude bonds held or controlled by Greece
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6. Implications of the PSI on Greek CDS
27
Greece CDS – a snapshot of the market
� Reference Entity: Hellenic Republic
� Western European Sovereign transaction type
� Credit Events
� Failure to Pay
� Restructuring
� Repudiation/Moratorium
� DTCC data*
� Over 4,900 trades outstanding
� $69.9bn of trades outstanding (gross basis)
� $3.2bn of trades outstanding (net basis) – small compared to outstanding debt
� Trading on ‘upfront’ basis due to market expectation of Credit Event
� Currently over 70 points upfront
* DTCC data derived from DTCC.com website 26/2/12
28
Greece CDS – a snapshot of the market
Greece USD 5-year CDS
Source: Bloomberg SOVR<GO. 26/2/12
29
Greece CDS - implications of the PSI
� PSI proposals could result in:
� Exchanges on voluntary basis only or
� Exchanges on mandatory basis through CACs (as well as voluntary) or
� No exchanges or binding amendments
� A voluntary exchange would not be a Restructuring Credit Event but a mandatory exchange (through the use of CACs) might be a Restructuring Credit Event
� If a Restructuring Credit Event occurs, market standard CDS would not automatically trigger (as optional) but it is generally expected that one of the parties will trigger
� Only need one bond issuance to be mandatory exchanged, so the PSI need not have 100% participation or effect across all bonds
� If there is a Credit Event, it is expected that a CDS auction would be held due to the “300/5” rule
30
Greece CDS - potential auction considerations
� If there is a Credit Event and an auction is held, the auction process would be “unbucketed”, i.e. not divided into different maturity buckets
� All relevant decisions made by the ISDA EMEA DC
� Timing of auction would be key to determining available deliverable obligations
� Deliverable obligations may include the following if (i) in existence and (ii) deliverable:
� Any new bonds issued by Greece as part of the PSI
� Any existing bonds issued or guaranteed by Greece that remain outstanding
� Other debt?
� EFSF bonds and GDP-linked bonds not considered deliverable
� Auction price typically driven by “cheapest-to-deliver” dynamics and current pricing implies low recovery
31
Greece CDS – the longer view
� If there is no Credit Event as part of the current PSI process:
� still possible that a Credit Event may occur in the future as events unfold
� the market could continue to trade at distressed levels if uncertainty persists although there could some significant volatility in the short-term if the market rethinks possible scenarios
� If there is a Credit Event as a result of the current PSI process:
� substantially all existing CDS expected to be settled
� new trading activity thereafter could be low if pricing remains at elevated levels due to continued uncertainty
� Irrespective of whether there is a Credit Event, if the PSI switches all or substantially all the Greek law debt into English law debt, the ability of Greece to restructure its debt in the future will be severely limited
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