Yesterday’s activation of the collective action clause (CAC) on Greece’s domestic law bond swap means that the exchange will likely be deemed a credit event by the International Swaps and Derivatives Association (ISDA) today. The participation rate on the domestic law part of the exchange was 85.8% (€152 billion), with pension funds representing the country’s journalists, police, doctors and lawyers understood to be among the holdouts.
According to Barclays Capital, bondholders with a total of €20 billion of foreign-law bonds and bonds issued by state-owned enterprises and guaranteed by the state have been tendered as part of the exchange, which represents the largest sovereign debt restructuring in history.
Some 95.7% of the country’s privately held bonds will be involved in the exchange. They will receive new bonds with a face value of just 31.5% of the old bonds, but with warrants attached to them that will pay out if and when Greece’s economic growth improves.
BarCap reckons that €6 billion of foreign-law bondholders are likely to holdout (the Greek ministry of finance has said that invitations to offer exchange and submit consents for these bonds and guaranteed bonds will remain open until March 23), but that the CAC on these bonds is unlikely to be activated.
If, as expected, Isda deems the swap a credit event, questions have been raised as to how the CDS auction process will work, given that the bonds on which the CDS were written – the old bonds – will no longer exist. If the CDS payout is based on the new bonds – worth 70% less than those they replace – there are concerns over the viability of the sovereign CDS market.
Isda has come under sustained criticism over potential conflicts of interest in its determinations committee (largely made up of the banks that will be facing payouts if the CDS are triggered), and earlier this month determined that the Greek private-sector involvement (PSI) process did not constitute a credit event as it is “voluntary”. But the activation of the CAC changes all that.
The impact on the wider market may not be as severe as many fear. “While we cannot rule out potential unforeseen problems through the settlement process of CDS or the potential inability of a counterparty to meet its commitments,” BarCap says, “we think that the relatively small amount of net notional exposure (around $3 billion), and improvements in counterparty risk management over the last three years mean that the process is likely to be relatively uneventful.”
