Greek Debt Default: What do Bond Holders Receive ?

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Investors' and Risk Managers' Perspective: Riskdata estimates the price of the new portfolio to be 211€ for each 1000€ of initial face value. The Portfolio Duration of the New Greek Bonds is close to 10 years.

Riskdata analyzes what Bond Holders receive after the First Eurozone Default in terms of Greek Write-Down, Portfolio Duration and CDS Credit Event Triggering and presents surprising results.

According to the terms of the Greek PSI agreement for debt restructuring, holders of sovereign Greek bonds will be delivered a portfolio of EFSF "PSI notes" and New Greek Bonds. In the context of the European debt crisis, Riskdata estimates the price of the new portfolio to be 211€ for each 1000€ of initial face value, whatever the particular bond being held, 150€ (71%) of EFSF note, 61€ (29%) of New Greek Bonds, the GDP-linked securities counting for less than 0.2% The combined Duration of the two EFSF notes is 1.5, while that of the New Greek Bonds is close to 10 years. The first phase of the swap, involving bonds issued under Greek law, was completed on March 12, cancelling more than 94.8 billion Euros in near and mid-term debt. The deadline for Greek Debt securities issued under foreign law has been extended and re-extended to April 20, but the Greek Ministry of Finance has warned that investors who refused voluntary exchange would be forced to accept the same swap terms. Moreover the International Swaps and Derivatives Association (ISDA), which manages Credit Default Swap (CDS) rules, has declared that a Restructuring Credit Event has occurred with respect to the Greek Private Sector Involvement (PSI). A CDS auction on Mar 19, 2012 has valued sovereign Greek bonds at 21.5% of their face value for the purpose of CDS settlement.

With the European Crisis in mind, a sufficient proportion of bond holders have accepted the swap provisions that will ultimately become mandatory for all investors. Moreover, whatever the term structure of previous bonds, they are being uniformly exchanged for a set of securities with clearly pre-defined characteristics. Specifically, 1000€ face value of old sovereign Greek bonds is replaced by a new basket with a combined face value of 465€: 150€ for EFSF notes (equally split between 1-year and 2-years) and 315€ for a set of New Greek Bonds, producing as a whole an amortizing structure from 11 years to 30 years. The GDP-linked securities represent a small coupon enhancement in case the Greek GDP meets certain conditions of level and growth. They have little impact on either price and or risk profile of the combined structure. Altogether, the portfolio of New Greek Bonds has an average duration of slightly under 10-years. In terms of market value as of today, while the EFSF notes are approximately equal to their face value, the portfolio of New Greek Bonds is worth 61€ and the GDP-linked securities amount to a fraction of a Euro (exact price depending on Greek growth assumptions), making the whole structure slightly above 211€

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Ingmar Adlerberg

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