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Crossposted from The Stars Hollow Gazette and DocuDharma
I don’t know what else you can call an 87% haircut.
Greece’s bond exchange: it’s official
Felix Salmon, Reuters
Feb 24, 2012 13:32 EST
Firstly, they’re going to receive new Greek bonds, maturing in 2042. It doesn’t matter whether the bonds you’re holding mature on March 20, or whether they mature in 30 years’ time — everybody gets the same new long-dated bonds, according to the face value of what they now own. In other words, the value of Greek bonds right now is wholly a function of what their face value is, and has nothing to do with their coupon or their maturity date.
The new Greek bonds have a step-up coupon: 2% through 2015, then 3% through 2020, then 3.65% in 2021, and then 4.3% from 2022 through 2042. Bondholders will receive new bonds with a face value of €315 for every €1,000 of old bonds they hold. (Again, remember that it’s face value which matters here, not market price.) What’s the market price of the new bonds going to be? Not very much; my guess is that they’ll trade at roughly 40% of face value. Which means that the “NPV haircut”, as far as the new Greek obligations are concerned, is somewhere on the order of 87%.
Mark to market baby.
4 Comments
Vent Hole
I don’t mind admitting I’m not used to this interface. I hope it looks and works ok.
[Ed. Note - looks just fine! You may find this FDL guide/tutorial useful to you.]
Personally, I liked this from Salmon’s blog:
http://blogs.reuters.com/felix-salmon/2012/02/23/matters-vision-for-long-form-journalism/
“But bondholders will get more than just Greek bonds; they will also get new EFSF notes. The new EFSF notes come in two flavors: one-year notes and two-year notes; their face value is going to be 15% of the face value of the tendered bonds. The working assumption right now is that they’re going to be worth €150 for every €1,000 of bonds tendered: in other words, if you look at the value of what bondholders are going to be receiving in exchange for their bonds, it’s going to be split roughly 50-50 between Greek bonds and EFSF notes.Finally, bondholders will receive GDP warrants of some description, which are the vaguest thing of all. “The GDP-linked Securities will provide for annual payments beginning in 2015 of an amount of up to 1% of their notional amount in the event the Republic’s nominal GDP exceeds a defined threshold and the Republic has positive GDP growth in real terms in excess of specified targets.” How much are these warrants going to be worth? The working assumption has to be zero, at least until we get some numbers for the minimum GDP and GDP growth that Greece needs in order to pay out on them.”
Greek English law bonds now trade at 35% off face – with EU guarantees, if there are any, it will be higher. The EFSF notes will be close to par, and the warrants will be nominal -
in all about 47 out of the 100 nominal goes to current bond holders
But as Argentine proved, those that refuse to do the exchange and keep their bonds can use them as wall paper, because Greece will do as Argentine has done – Argentine has ignored and plans to continue to ignore the bond holders that refused the exchange 10 years ago.