Hedge funds in New York and London are trying to profit from trading Greek government bonds as European banks brace for losses from a debt swap.
Saba Capital Management LP, founded by former Deutsche Bank AG (DBK) credit trader Boaz Weinstein, York Capital Management LP, the $14 billion fund started by Jamie Dinan, and London-based CapeView Capital LLP are among managers that now hold Greek bonds, according to people with knowledge of the transactions who declined to be identified because they weren’t authorized to speak publicly about the trades. Officials at the three firms declined to comment.
They’ve amassed the stakes as the government lobbies investors to accept a swap that would cause losses of more than 50 percent for bondholders. For the deal to avoid triggering credit-default swaps that could cause losses for more of the region’s banks, the agreement has to be voluntary. Hedge funds may not agree to the deal.
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“I would expect to see some holdouts,” said Sudeep Singh, a hedge fund manager at Matrix Group Ltd. who doesn’t own Greek debt. “The industry breaks down into guys who want to keep on fighting and into guys who just want to get the best deal and move on. It’s all a question of what price you got in at.”
Some fund managers say they have little incentive to accept the swap, and are seeking full payment. If Greece refuses to pay the funds what’s owed to them, the funds may seek to trigger the credit-default swaps. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
European officials, including former European Central Bank PresidentJean-Claude Trichet, have tried to avoid a default that would cause what he called a “credit event.” Triggering the CDS could encourage traders to increase their bets against other indebted European nations such as Italy, Portugal and Spain — worsening the debt crisis.
Saba bought Greek debt maturing in one year, Weinstein said at an investment conference in September. The price paid factored in at least a 75 percent chance of default, said Weinstein, whose New York-based hedge fund oversees about $5 billion. His biggest fund climbed 9.3 percent last year, according to a person briefed on its performance. New York-based York Capital also owns Greek sovereign debt, according to another two people.
Greek officials held meetings last year with CapeView Capital, the fund started by former Deutsche Bank executive and Trafalgar Asset Managers Ltd. founder Theo Phanos, to discuss the firm’s sovereign debt investments, said another two people, who declined to be identified because the meetings were private.
Officials led by German Chancellor Angela Merkel and French President Nicolas Sarkozypersuaded banks in October to agree to exchange their Greek bonds for new securities with longer-dated maturities and lower coupon rates, as part of a tentative accord aimed at slashing the nation’s debt and halting the spread of a crisis that has plagued Europe for more than two years. Banks and politicians are still negotiating the exact level of losses imposed on private bondholders in the swap.
Of the 355 billion euros ($450 billion) of outstanding Greek debt, about a third is held by the ECB, the European Union and the International Monetary Fund, according to estimates by Open Europe, a research Group based in London and Brussels.
The swap would slice about half of Greek’s remaining 200 billion euros of debt, most of which is owned by banks. About 80 billion euros is held by overseas investors such as insurers, sovereign wealth funds and hedge funds, Open Europe said.
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