Market Mover - BNP PARIBAS - Investment Services India

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This section is classified as non-objective researchGreece: “Deeper” PSI After the EU Summit• The long awaited deeper PSI is now officialafter the conclusion of the EU Summit. Amongthe things we know, it remains a voluntaryoperation, it involves a 50% nominal discounton notional of GGBs held by private investorsand it includes a EUR 30bn contribution fromEU member states.• There are several things we still don’t knowsuch as the GGB eligibility pool, the requiredparticipation rate, the characteristics of thecollateral and the characteristics of the new PSIbonds.• The official sector will provide an additionalEUR 100bn programme financing until 2014. Thenew programme should be agreed by the end of2011 and the exchange of bonds should beimplemented at the beginning of 2012.Table 1: NPV Estimation Under 100%Collateralisation via AAA BondsNew PSI Bonds (100% Collateral)Discount RateNPV Estimation9% 12%4.5% 39.3% 34.3%Coupon6.0% 47.0% 40.4%Source: BNP ParibasTable 2: NPV Estimation under 30bn CashInstead of AAA BondsNew PSI Bonds (0% Collateral) + CashDiscount RateNPV9% 12%4.5% 43.1% 36.0%Coupon6.0% 50.8% 42.0%Source: BNP ParibasWhat we knowIn our recent piece “Greece: PSI Revisited, 19October” we explained why the original PSI had tochange and how it could be tweaked to lead todifferent NPV reductions. In particular, we analysedthe impact of each factor (coupon, discounting rate,haircut on the notional, collateralisation percentage)on the NPV of the new bonds. We also highlightedthe importance of some form of collateral in the PSIexchange in order to help facilitate a higherparticipation rate.The EU Summit statement which was released in theearly hours of 27 October sheds some light on thenew form of the PSI (twelfth paragraph). In moredetail, we know the following facts:• There is still a discussion between Greece andits private investors to find a solution for a deeperPSI. This means that there has yet to be a finalagreement.• The PSI aims at reducing the debt/GDP ratio to120% by 2020. We still need to find out if thismetric refers to gross or net debt.• It remains a voluntary operation.• There will be a nominal discount of 50% onnotional Greek debt held by private investors.• EU member states would contribute to the PSIpackage up to EUR 30bn.• The official sector will provide additional financingof up to EUR 100bn until 2014 including therequired recapitalisation of Greek banks.• This new programme should be agreed by theend of 2011 and the exchange of bonds shouldbe implemented at the beginning of 2012.What we don’t knowThere are still many important details missing withrespect to the new deeper PSI. In more detail:• What is the expected and required participationrate in this new PSI (it was 90% on 21 July)?• What is the sample of eligible GGBs forparticipation in this new PSI? In the 21 Julydescription, the eligible pool included almost allGGBs maturing up to 2020. According to thepress, this has been extended to include alloutstanding GGBs except for ECB holdings. TheEU Summit statements refers to “Greek debtheld by private investors” and hints at the wholeoutstanding of GGBs, excluding the ECBholdings. We still do not know what is going tohappen to the GGBs maturing in December andto those which matured in August which were stilleligible for the original PSI. The new pool isestimated at around EUR 206bn versus 150bnon 21 July. This implies that the debt buybackoperation might no longer be on the table sincethe targeted bonds were supposed to be thelong-end bonds (after 2020) which were not PSIeligible on 21 July. The fact that all GGBs (exECB holdings) could be PSI eligible now meansthat there are no GGBs left for buybacks (unlessthe ECB is willing to sell some of its GGBholdings, of course).Ioannis Sokos 27 October 2011Market Mover36www.GlobalMarkets.bnpparibas.com
This section is classified as non-objective research• What will be the form of the EUR 30bncontribution from EU member states? Back on 21July, the collateral was expected to be 30y EFSFzero coupon bonds for the first 3 options and 15yamortising EFSF floating rate bonds for option 4(the official announcement did not specify whichkind of AAA bonds would be used but there wasa wide consensus in the market about EFSFbeing the issuer of these defeasance assets).There have been various market rumours thatthis new deeper PSI might involve cashpayments to GGB holders instead of AAA bonds.However, paragraph 14 in the EU Summitstatement says that “credit enhancements will beprovided to underpin the quality of collateral soas to allow its continued use for access toEurosystem liquidity by Greek banks”. On top ofthat, there was a statement by Hung Tran, theIIF’s deputy managing director, that thisEUR 30bn of official funding will be used tocollateralise the new bonds with AAA rated zerocoupon bond securities. Of course, we are stillmissing all the pricing details with respect tothese AAA bonds, i.e. maturity, coupon, yield.• What are the characteristics of the new PSIbonds? Back on 21 July, there were 4 optionswith different characteristics among them. Theconsensus now is that there is going to be only 1option. For all NPV considerations we need toknow the maturity profile, coupon and discountrate of these new PSI bonds.What makes senseAfter having noted what we know and what we don’tknow, we can start thinking of various scenarios thatmake sense to us given the numbers that we doactually know. First of all, it is very interesting that theEU members’ contribution to the PSI is now specifiedin EUR and not in NPV terms. The limit of EUR 30bnis a signal that the EU authorities learned the lessonof the 21 July deal where collateral turned out to bemuch more expensive than initially thought. Backthen, it was agreed that AAA bonds would guaranteethe notional repayment of the new Greek PSI bonds.In the meantime, AAA rates fall massively and theAAA collateral became much more expensive.A scenario of 90% participation over a PSI pool ofEUR 206bn, leads to a figure of EUR 185.4bn. Whenapplying a 50% haircut on this amount we end upwith a new notional of Greek PSI bonds ofEUR 92.7bn. The EUR 30bn collateral is 32.4% ofthe EUR 92.7bn of notional of the new PSI bondswhich is almost identical to the price of the 30y AAAzero coupon bonds that was used on the 21 Julydeal. In simple terms, you can spend EUR 30bntoday to buy such an amount of 30y AAA zerocoupon bonds that will guarantee the repayment ofthe new notional of the EUR 92.7bn PSI bonds after30 years.Of course, as explained before, this is based on aseries of assumptions and can only be used as amathematical calculation that makes sense with thefigures that we do know from the EU Summitstatement.Under the alternative scenario where the 30bn iscash and not AAA bonds, the investors will end upwith a new PSI bond which will carry only Greek risk.Thus it will have a lower NPV compared to theprevious case where the notional is guaranteed byAAA bonds. This shortfall in NPV terms will becompensated for with cash delivery at the time of theexchange. In the case where the notional repaymentis not guaranteed by the AAA bonds but will have tobe paid by Greece, there is a possibility of using anamortising bond in order to smooth out theredemption profile and avoid a 30y bullet bond whichwould create a huge spike in the redemption profileof Greece. This would have NPV implications toosince the cash flows will change substantially.NPV considerationsIn this last section we try to get a feeling of where theNPV of this new PSI package will stand. As notedabove, this can only be done under a combination ofassumptions. Here we examine both the 30y AAAzero coupon bonds (worth EUR 30bn) scenario andthe EUR 30bn cash scenario that were describedabove. We use a combination of coupon of 4.5% and6% and discount rate of 9% and 12%. Tables 1 and 2show the results of these NPV estimates.Starting with Table 1, the notional of the new 30y PSIbonds is guaranteed by AAA zero coupon bonds(which are priced at 32.4% NPV). The NPV of thePSI deal (as a percentage of the original GGBsnotional) in this case varies from 34.3% in the lowcoupon/high discount rate case to 47% in the highcoupon/low discount rate case. Table 2 shows theresults under a no AAA collateral scenario, whereinvestors are given EUR 30bn of cash, or(30bn/185.4bn) 16.2% NPV under a 90%participation scenario. Bear in mind that this NPVpercentage will vary according to the participationand the PSI eligible pool of GGBs since the onlyconstant is the EUR 30bn figure. The NPV of thisoption ranges from 36% to 50.8%.The reason that the NPV is a bit higher in this case isbecause investors will receive the principalredemption in 30y by Greece and still receive 16.2%of NPV in cash while in the AAA bonds caseinvestors receive only a coupon stream by Greeceand the AAA bonds which are worth 16.2% of NPV,i.e. there is no principal repayment by Greece (in linewith original PSI terms). The principal redemption willtake place via the AAA bonds in this case.Ioannis Sokos 27 October 2011Market Mover37www.GlobalMarkets.bnpparibas.com
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