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| Greece | |
| Size | €206 billion private sector involvement debt exchange |
| Date | February 2012 |
| Lead dealer managers/closing agents | Deutsche Bank, HSBC |
| Financial adviser to Greece | Lazard |
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Greece’s epic €206 billion private-sector debt restructuring last year was of importance not only for the average man or woman on Athens’s ancient streets, but also for the country at large, the eurozone and the entire global financial system.
For if the restructuring had failed, the consequences for all four would not bear thinking about: a modern tragedy on a monumental scale would have played out.
Thankfully, the restructuring in March was a remarkable success, allowing the Greek government to be forgiven €107 billion – 53.5% in nominal terms – of its total private-sector debt.
It was a result that has helped restore some form of financial health and stability to Greece, while at the same time suppressing acute fears over a Grexit and indeed the eurozone’s survival in its current form.
Greece remains in a perilous state. But the largest ever sovereign restructuring has pushed the country back from the edge.
Unsurprisingly, it took a gargantuan effort finally to get it there, and a tremendous amount of haggling.
“When we started this process everyone was trying to figure out how we would succeed in restructuring Greece without having to take real haircuts, because that would obviously hurt the European banking sector at a time when it was vulnerable,” says Hakan Wohlin, global head of debt origination at Deutsche Bank, which advised the Greek government on the restructuring, or so-called “private sector involvement”.
“However, during the summer of 2011 Deutsche Bank announced that it would take an impairment on its Greek debt holdings, which was the first time a eurozone government’s debt has been impaired. This was a crucial decision that helped pave the way for the eventual restructuring to be completed,” says Wohlin.
The brief backstory to this is that in July 2011 Greece mandated BNP Paribas, Deutsche Bank and HSBC to arrange a private-sector debt exchange of €135 billion of securities with a net-present-value haircut of 21% using a 9% discount rate.
Deutsche Bank and BNP Paribas, among other eurozone financial institutions, were Greece’s largest private-sector creditors, so the prospect of a sovereign default was particularly uncomfortable.
Haircuts to their holdings were not particularly palatable either, but they were a necessary evil.
However, during the third quarter of 2011 Greece’s economic condition dramatically worsened, forcing the terms of that exchange, known as PSI-I, to change.
The new terms emerged in October and required a 50% nominal haircut by private-sector creditors, a €100 billion debt write-down, and to target all €206 billion of privately held Greek government bonds in a voluntary exchange.
It was not until February 22 2012, however, that the exchange offer was drafted and finally published, with a last-minute change increasing the nominal haircut to 53.5%.
“It would have been much better if this restructuring could have been executed much sooner,” says Wohlin. “In order to make Greece sustainable we needed to see this type of haircut.”
Robert Gray, chairman, debt finance and advisory, HSBC in London, adds: “Where there was delay it was mainly a result of the difficulty of coordinating so many players on the official side. I don’t think there was any question that on the private side there wasn’t any willingness to face reality and accept a haircut, which got bigger and bigger as time moved on.”
The acceptance by private-sector creditors that such hefty losses on Greek government bonds would have to be endured was crucial to the success of the PSI-II €206 billion restructuring in March 2012.
The restructuring came via a voluntary exchange, and on March 9 Greece announced that 83.5% of its bondholders had voted in favour of the proposed 53.5% nominal haircut on the country’s €206 billion of outstanding bonds in private-sector hands, triggering the biggest-ever sovereign restructuring and the first in western Europe for 64 years.
That was enough to trigger a collective action clause to impose the deal on all the €177 billion of bonds written under domestic Greek law.
Additionally, Greece said that holders of €20 billion of foreign law bonds, or 69% of that portion, had agreed to tender their bonds.
When added to the €177 billion of Greek law bonds to be exchanged voluntarily or otherwise, 95.7% of all the €206 billion eligible bonds would ultimately be exchanged.
As part of the exchange for new Greek bonds, investors also received €35 billion of European Financial Stability Facility notes as a ‘cash sweetener’ and payment of accrued interest.
“A defining moment was the decision to pass the Greek Bondholder Act – the legal initiative that basically allowed for the retrofitting of a collective action mechanism to the Greek law bonds,” says Gray. “Without that move it would have been hard to imagine that we could have achieved the percentage participation that the Troika demanded. That was clearly a seminal moment and perhaps individually the most interesting aspect to this deal. That not only had the benefit of ensuring that the transaction proceeded but also that it ensured that the CDS market was validated, which was crucial.”
Gray adds: “What has to be brought to mind here, and particularly when looking at the Argentina pari-passu fracas, is that this transaction was voluntary and market-based, where we had a sovereign nation negotiating in good faith with a fundamentally cooperative set of creditors. It is worth stressing that one of the major contributors to the success of the deal was that Greece had the good judgment to negotiate with one single creditor committee, coordinated by the IIF. Indeed, without that bilateral axis it would have been very hard to achieve what they did. This is a reminder that a statutory mechanism is not necessary, and where a debtor is acting in good faith and the creditors are similarly properly organized, you can put together something that works for all sides.”
