May 30, 2012 / 7:08 PM / 5 years ago

Investors turn to Hellenic Telecom for Greek exit play

LONDON, May 30 (IFR) - Hellenic Telecommunications Organization (OTE), a perfectly healthy Greek company, has become the weapon of choice for investors betting that Greece will leave the euro by year's end.

Five-year credit protection on the company has tripled since March, as investors use its credit default swaps (CDS) as a proxy for betting that the collapse of the euro is imminent.

Although rated B/B- by S&P and Fitch, respectively, OTE is viewed by most analysts as fundamentally sound. It is 40% owned by Deutsche Telekom, gets around a third of its revenues abroad, and should have liquidity to tide it over the next few years.

But it is also based in the country that has been the bane of financial markets for the past two years - and now has the eurozone teetering on the brink of collapse.

"OTE is the only liquid Greek CDS out there, so people are trading it as a proxy for Greece leaving the euro," said Michael Hampden-Turner, credit strategist at Citigroup.

"Some are convinced that its fundamentals are strong and it will survive short-term. But the majority feel that if Greece were to exit, then OTE would almost certainly default too, which is why it's trading at recovery levels," he said.

Five-year Hellenic Telecom CDS reached a record wide of 3,846 basis points (bp) on May 18 from 1,254bp in mid-March, shortly after Greece pulled off the largest sovereign restructuring in history by shaving around 100 billion euros off its national debt.

One-year CDS - which has become a particular focus due to fears over an imminent Greek departure from the eurozone - now trades at 36 points upfront. In other words, an investor would have to pay 3.6 million euros on day one to buy protection on 10 million euros of notional, with 500,000 euros of coupon payments due over the course of the year.

Hellenic Telecom has long been a mainstay of the credit index markets. It was in the iTraxx Main Europe index Series one to 14 and iTraxx Crossover Series 15 to 17, with an equivalent of $1.7 billion and $407 million notional outstanding in each set of indices respectively.

The net notional of single-name CDS on OTE stands at $1.14 billion, with loans outstanding of $1.13 billion.

At the same time, there are increasingly fewer ways to play a Greek exit without having to resort to expensive and unpredictable proxy trades such as shorting peripheral countries.

CDS on Greece itself is still not trading since the contracts were triggered in March and there are few other reference entities that offer enough liquidity to play around with.

Despite trading at such wide levels, dealers report CDS on OTE is relatively liquid, and that trades of $5-10 million pass through the market without too much fanfare.

"There's a relatively hefty amount in indices and the single-name CDS was always widely traded - so in all, has more net notional outstanding than the sovereign had," Hampden-Turner said.

GOOD COMPANY, TROUBLED COUNTRY

Investors see the company's fate inextricably linked to Greece's, which is set to undergo another round of elections on June 17 following an inconclusive vote in May.

"The equity market is still debating whether OTE will issue a dividend this year," said Andrew Sheets, head of European credit strategy at Morgan Stanley.

"The credit world is debating about whether it faces an imminent default. Credit markets are pricing in a great deal of systemic risk that has little to do with the firm's underlying fundamentals."

Sheets highlights OTE's CDS curve, which shows the market reckons Hellenic Telecom's annual default probability is higher over the next year than it is over the next three.

"Our economists put the chances of a Greek exit at 35%, which is probably lower than what is implied by CDS on OTE," he said.

Credit traders believe OTE should be able to weather a Greek exit, thanks to support from its German parent, although one said it was "50-50" whether they would file for bankruptcy.

"We don't really know what precedent to go by," said Morgan Stanley's Sheets. "Deutsche Telecom owns a significant stake in OTE, but when Argentina defaulted, France Telecom and Telecom Italia let their local subsidiary default despite they themselves being stronger credits." (Reporting by Christopher Whittall)

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