Hedge funds seeking to wring profits from a Greek debt restructuring are underestimating the will of policymakers to impose losses on them, according to investors who say trying to beat the politicians is too risky.
“It's hard for us to come up with an investment thesis that makes it interesting,” said Robert Rauch, a partner at Gramercy Advisors LLC, a $2.8 billion hedge fund in Greenwich, Conn., that's avoided investments in Greek debt. “It's not clear to us that out of this process you can make any money.”
Greece's talks with private creditors, led by the Institute of International Finance, have dragged on for more than two months as the nation's European partners pressure creditors to accept lower interest rates on new debt to ensure a sustainable debt load for the Mediterranean nation. The agreement must be voluntary so as to avoid triggering credit-default swaps.
Bruce Richards, who runs Marathon Asset Management LP, said two weeks ago that a swap would be struck that gives his firm and other investors new bonds paying an annual interest rate of as much as 5%. His view proved optimistic after European officials pushed for steeper losses of 70% or more, leading to average coupons of about 3.6%.
European banks own most of the €200 billion ($263 billion) of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other “non-regulated investors,” own another €60 billion, according to estimates by Pavan Wadhwa, J.P. Morgan Chase & Co.'s head of global interest rate strategy. The International Monetary Fund wants to get owners of about 88% of Greece's bonds to take part in the swap to reduce the country's debt-to-gross domestic product ratio to 120% by 2020, Mr. Wadhwa said.
Because hedge funds and other holders could collectively keep the participation rate below that level, Greece has said it may approve legislation that imposes losses on investors who don't support the voluntary swap by adding a retroactive collective action clause into its bond documentation. Such a provision would give a majority of bondholders the ability to force holdouts to accept the same terms as everyone else.
Hedge funds that hold Greek debt include Och-Ziff Capital Management Group LLC, York Capital LP, Saba Capital Management LP, Greylock Capital Management and Vega Asset Management LLC. Vega resigned from the committee of creditors negotiating the swap in December because the Madrid-based hedge fund refused to accept a net present value loss exceeding 50%, according to an e-mail sent to other panel members, which was obtained by Bloomberg News. Marathon, with $10 billion under management, is still on the credit committee of the Washington-based IIF.
Och-Ziff and York Capital, hedge funds that manage $42 billion in total, have said their investments in Greek debt aren't significant and that they've had no involvement in restructuring talks. Greylock is on the IIF steering committee that negotiated the bond swap with officials from Greece, Europe and the International Monetary Fund.
“This is not the type of deal that the official sector likes to designate as ‘vulture funds making big windfalls,'” Greylock President Hans Humes said in an interview. “Hedge fund holdings aren't significant and hedge funds that bought are clearly not going to endanger this deal.”
It will be difficult for holdouts to assemble enough votes to block any collective action clause, because European banks have an incentive to support the provision, fund managers said.
A lawsuit against a collective-action clause legislated by the Greek government may also be difficult to win, because it would probably have to be filed in Greece, said a hedge fund executive whose firm holds the country's debt and has examined the legal options. The executive declined to be identified because the firm's holdings are private.