The terms of a Greek bond buyback plan is good news for hedge fund managers. Last week, hedge funds drove up prices for Greek sovereign debt correctly betting that Europe’s finance ministers would back off an original pledge to pay no more than roughly 28% of its face value.
Yesterday, Greece’s government said it would use €10 billion ($13 billion) to buy back outstanding bonds with a face value of €62 billion. Greece and its investors will pay prices up to 34% of their face value, which could provide a handsome profit for funds that have been building up positions in Greek debt. Some hedge funds have bought debt at 15% of its face value in an auction running until Dec. 7.
The buyback plan was approved by European finance ministers following a German rejection of any write-offs as a way to bring debt to 124% of GDP by 2020, part of the terms agreed to hand over billions more in bailout aid. At the time, officials said they expected to pay no more for the bonds than the closing price on Nov. 23. That pledge couldn’t be kept, as it’s become clear that not enough bondholders would buy in at that price, putting Greece’s rescue at risk—and suggesting a certain amount of ignorance on the part of finance ministers about how the market operates.
Hedge funds have been piling into Greek debt ever since March, thinking that prices and yields reflected that Greece would ultimately default. A recent market rally has pushed the 10-year yield below 15%, while over the past six months, the price has more than doubled on the back of funds buying Greek sovereign debt, assuming prices would rise as the risk of a Grexit declined.
Funds that stand to profit include Daniel Loeb’s Third Point, Louis Bacon’s Moore Capital Management, David Tepper’s Appaloosa Management, and Jeffrey Tannenbaum’s Fir Tree Partners, according to unnamed sources reported by Bloomberg.
The buyback will be run through a kind of Dutch auction, at the end of which the bonds issued nine months ago amid Greece’s restructuring will be retired. It works like this: investors say a price at which they will sell their bonds at before a price is set, and then investors express any interest in buying by Dec. 7.
Assuming that hedge funds buy in at a lower price, they stand to profit. Bloomberg reports that hedge funds hold Greek bonds worth as much as €22 billion, and that if Greece offers to pay 34% of face value, the firms will probably agree to sell bonds worth about €8 billion. Of course, if there’s not enough interest in the auction, Greece risks default and hedge funds and, really, everyone lose.