Greek PSI – A First Attempt At Valuing

So here is the first official statement I’ve seen on the PSI.

For some reason, there is no real haircut on accrued interest.  I took a look at all the GGB bonds (non-English law bonds).  That is just under €240 billion in notional outstanding.  Clearly some of this is held by the ECB.  Using a date in early March, I get the accrued interest outstanding on all these bonds to be about €7 billion.  This interest will be paid with 6 month EFSF notes.  Why wait 6 months to pay the accrued, and why use EFSF to do it?  I’m sure there is a reason, but it’s not obvious to me.  Why not subject the interest to a haircut?  I assume it has something to do with the myth of it not being a default and bank book accounting treatment.  But it is going to be over €3 billion going to creditors rather than to Greece.  Since all the bonds are trading with accrued and 6 month EFSF paper should be about par, this is already included in the bond prices.

The EFSF will issue bonds of not more than 2 year maturity equal to 15% of the notional.  It seems that at the same time the EFSF will enter into a deal with Greece.  Investors who get the 2 year EFSF bonds won’t have any Greek risk, but since Greece will be paying the EFSF in some sort of agreement, that won’t reduce Greece’s debt outstanding.  There is no mention of what coupon (if any) the EFSF bond will have.  Let’s assume the bonds would trade at 99% of par (the coupon will be fair, and this is just the bid/offer).  That would provide just under 15 points of value.  (As details on the EFSF bonds become available, a more accurate estimate of value can be made).

Bond holders will also receive 31.5% of their notional in new Greek 30 year bonds.  From this, it seems like they will be bullets (though have read some reports that they will be amortizing).  They pay 2% until 2015, 3% until 2021, and 4.3% thereafter (they were clearly designed around the IMF 2020 target).  A 10% discount rate would give these bonds a value of about 36% and at 15% it drops to 21%.

So depending on what yield you apply to the new Greek bonds, then the package is worth 21.5% to 26.25%.  Since bonds are trading with accrued and accrued will be paid in 6 months, the real question comes down to what you believe is the value of these new bonds.  If there is an amortization schedule, that would change the valuation positively.

Investor also get a GDP linked “kicker”, but it is capped at 1% per annum, starting in 2015.  This has some value, particularly if Greece starts growing, as the discount rate should also improve, but tough to attribute much value to this at this stage.  If the notes are amortizing, the value of the kicker decreases, since it would be on a lower notional.

We still haven’t seen retroactive CAC clauses implemented, but assuming that they are, I’m not sure why the Troika would accept a 95% rate and not trigger, but it seems worth taking the risk.  The ECB swap may be illegal.  The retroactive CAC may be illegal.  The Troika seems like it wants to pretend there is no default if at all possible, in spite of the write-down of more than 50% of the debt.