Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default Wor

[JohnQPublic]

Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World (http://www.zerohedge.com/news/subordination-101-walkthru-sovereign-bond-markets-post-greek-default-world?page=1)



An important read. Very complicated though.

What I got out of it- ~90% of Greek debt is covered under Greek law, and has no Collective Action Clause (CAC, meaning there is no agreement that X%, say 66 or 75, of bondholders can by agreement change the terms for 100%).



On the other hand ~10% falls under UK law, and has a 66% CAC.


Now it is hypothesized that Greece can retroactively create a CAC for its local law bonds (with a penalty of loss of future confidence, etc.), and thus force say a 66% agreement. But, this will not effect the 10% under UK law.


The gist is that hedge funds are buying up the UK bonds with hopes to hold 33%+1 share of the ~10% UK law bonds, so they can thus use this ~3% of total Greek bonds to block any general agreement, and control the negotiations to there benefit.


The article discusses some workarounds, possible role of the ECB, other hedge fund strategies (such as post default lawsuits), etc.

[JohnQPublic]

ZeroHedge was ahead of the game again:

Hedge funds prepare legal battle with Greece (http://www.reuters.com/article/2012/01/24/greece-hedge-funds-idUSL5E8CN0OR20120124)

By Sarah White and Tommy Wilkes
LONDON | Tue Jan 24, 2012 6:52am EST

"BLOCKING TACTICS...

...If Greece can get the go-ahead from about two-thirds of private creditors, it plans to pass laws to coerce reticent bondholders, like the hedge funds, into taking losses, sources have told Reuters.

To counter this, some hedge funds are going for defensive strategies and buying up some of the 18.3 billion euros of Greek bonds that were drawn up under English or foreign law, industry and legal sources said. These would be immune from any changes to Greek law.

The English law bonds do contain so-called collective action clauses designed to force outliers into a deal -- but they state Greece would have to get 75 percent of creditors to back a deal, most likely higher than the threshold Athens would impose in domestic law bonds in its bid to get a deal done. That would make an overall agreement with private creditors very hard to reach, and give hedge funds ways of resisting further deals if Greece were to default.



They also contain precise clauses that could help hedge funds sue or eke out a settlement if they are forced into an unfavourable bond swap, because they are not being treated equally to other creditors like the European Central Bank.
The English law bonds include pari passu clauses, which mean creditors have to be treated on an equal footing and could give them leverage over the ECB, which owns around 45 billion euros worth of Greek bonds bought in the secondary market.


So far the ECB has shown unwillingness to participate in the bailout, but if Greece can succeed in forcing funds to take losses, the holders of these English law bonds could argue the ECB's immunity is unfair.


One big worry is that hedge funds could buy up enough of the English law bonds to block the clauses from being triggered for specific bond issues, although none of the sources contacted by Reuters had evidence of this happening yet."