LONDON Aug 21 A handful of plucky hedge funds
are nibbling again at cut-price Greek government bonds,
increasingly optimistic that progress in talks between Athens
and international lenders will deliver a better principle payout
Such funds think the bonds, which attracted few buyers after
a second bailout in March inflicted heavy losses on private
investors, may now be a bargain as hopes grow politicians can
keep Greece on track to meet conditions for its cash lifeline.
Speculation that Athens may also get more debt relief, this
time at the expense of public lenders and central banks, is also
encouraging the interest from hardy, and discreet, buyers.
While market volumes are still low, with many funds opting
to steer clear of such a bombed-out asset trading at barely 17
percent of face value, one manager - Adelante Asset Management -
reckons that caution has been overdone; it doubled its holding
in a basket of Greek bonds at around 14 cents some weeks ago.
The London-based firm's CEO, Julian Adams, had bought a
first holding at 12.5 cents on the euro shortly before June's
parliamentary election, aiming to turn a profit of a third by
selling the position once the price reached 16 or 17 cents.
But although that initial target has now just been reached,
Adams, whose firm manages about $110 million in total, has
decided to stick with the play, raising his fund's exposure to
Greek debt to 4 percent from 2 percent.
"It really depends on how events play out," Adams
acknowledged in an interview this week, but he saw prices rising
another few points. "If events continue to play out, then the
low 20s" would, he said, be a possible price for the bonds.
Adams bases his forecasts on the probability that Greece's
cost-cutting plans will win approval from the troika of official
debt monitors, while private bondholders could also profit if
the European Central Bank accepts losses on its positions.
"Negotiations with the troika are going very well," he said.
"It looks as though they're negotiating the necessary budget
cuts for the next few years. It looks like they'll get agreement
from the troika," he added.
Approval from the trio of IMF, European Commission and ECB
is key for public lenders in deciding whether to keep funds
flowing - cash that could also improve eventual repayment
prospects for bondholders. A Greek finance ministry source said
on Monday approval was likely by mid-September.
Adams also sees a longer term boost from public lenders
writing off some of Athens' debts: "The IMF has done debt
simulations, which show Greece needs more debt forgiveness," he
said. "This will need to come from the official sector, which
would be extremely positive for private sector bondholders."
Adams is not alone in building up Greek exposure: "There's a
general feeling that ... there's a more favourable outlook," one
London-based prime broker told Reuters. He knew of at least one
other hedge fund manager looking to add to its Greek holdings.
Yields on Greek government bonds maturing in
February 2027 have fallen from 29 percent at end-May to below 23
percent. The bid-offer spread on 10-year bonds has narrowed to
about 1 percentage point, demonstrating greater liquidity
compared to spreads about twice as wide in May - and well down
from highs around 9 points seen at the height of the crisis.
"We have seen a pick-up in volumes in the past three to four
days, but they are still very low, around 10 to 20 million euros
a day," said one trader in Athens, adding that some foreign
banks and "occasionally" hedge funds were buyers. Greece remains
one of the euro zone's least liquid sovereign bond markets.
Greece is dependent on its second, 130-billion-euro ($160
billion) rescue deal to give it the cash to keep paying wages
and other bills. Adelante's Adams said he expects an agreement
to be struck between Greek Prime Minister Antonis Samaras and
German Chancellor Angela Merkel when they meet this week.
Citing pressure on EU leaders to avoid haggling that could
re-ignite panic over the state of Spain's much bigger economy,
he said: "The deal will be cut this week over various dinners
amongst the heads of government."
(Additional reporting by Swaha Pattanaik and Marius Zaharia;
Editing by Alastair Macdonald)