Greece’s Exchanged Bonds May Yield 20%, Morgan Stanley Says
By John Detrixhe and Zeke Faux - Mar 9, 2012 1:01 AM GMT+0200

Yields on Greece’s new bonds may climb to as high as 20 percent amid “material risks” stemming from implementation of terms for the biggest sovereign restructuring in history, according to Morgan Stanley.

Traders are offering to buy and sell the potential new bonds at yields on 11-year securities of 22 percent, according to a person familiar with the prices who declined to be identified. Yields on exchanged Greek debt may be about 13 percent to 17 percent “in the medium term” as the nation faces an election and seeks to comply with terms of its bailout and debt-reduction programs, New York-based Morgan Stanley said yesterday in a research report.

Private investors agreed to swap about 85 percent of their Greek government bonds for new securities, according to a banker briefed on the results. The goal of the exchange, results of which are scheduled for release later today, is to reduce the 206 billion euros ($273 billion) of privately held Greek debt by 53.5 percent.

While the debt swap hasn’t yet been finalized, trading new Greek bonds in the so-called gray market may be attractive to investors as they seek ways to hedge their holdings amid political debate and concern that credit-default swap insurance on the debt may not pay out, said Russ Certo, managing director of rates trading at Gleacher & Co. in New York.

‘Unintended Consequences’
“You’re in the world of opposites and unintended consequences,” Certo said in a telephone interview yesterday. “There are some willing sellers of sovereign paper in the secondary market right now because they don’t feel they’re getting adequate protection in the CDS market. People are hedging bets.”

The bonds are being offered on a “when-and-if-issued basis,” meaning that trades will be settled provided Greece’s debt restructuring is successful, according to rules posted on the website of the Emerging Markets Trade Association. The new 15-year Greek bonds may yield about 20 percent, said the person familiar with the prices who declined to be identified because he wasn’t authorized to comment.

The EMTA, a trade group in New York, also posted rules for separate trading of the warrants that Greece will give investors that provide extra income in years when Greek economic growth exceeds certain thresholds.

Pessimistic Outlook
The market may receive as much as 65 billion euros of new Greek bonds with an average maturity that’s increased to 20 years from seven years, Morgan Stanley fixed-income strategists Paolo Batori and Robert Tancsa and economist Daniele Antonucci wrote in the report. Absent “surprises,” the securities may stabilize at about 25 cents on the dollar, they wrote.

The prices that the new bonds are trading at show that investors are pessimistic about Greece’s prospects after the debt swap, according to Mark Grant, managing director at Southwest Securities Inc.

“They couldn’t pay the old debt back, so how do they pay the new debt back?” Grant said in an interview from Fort Lauderdale, Florida.

Preliminary indications showed that as much as 155 billion euros of the 177 billion euros of Greek-law bonds were offered, said the banker, who declined to be identified. Twelve billion euros of bonds not under Greek law was also tendered, as was 7 billion euros of debt from state-owned companies guaranteed by the government, the banker said.

Finance Minister Evangelos Venizelos will hold a press conference at 1 p.m. Athens time, the Finance Ministry said in an e-mailed statement.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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