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By Helene Durand
LONDON, Oct 15 (IFR) - Investors in Piraeus Bank face losing over half the value of their senior debt holdings after the Greek lender launched a liability management exercise in a bid to strengthen its capital base.
The bank on Thursday announced an exchange offer on 1.1bn of its subordinated and senior bonds, of which a total 592m remains outstanding. It will swap the notes for either shares or cash, the latter option saddling investors with a steep haircut on their positions.
Greek bank debt dropped like a stone in August after the approval of Greece's 86bn third bailout increased the chances of a debt bail-in.
That prospect has now become very real, with investors holding a 500m 2017 senior bond launched less than two years ago facing the possibility of getting back 43% of par.
Accounts that own 400m 2016 subordinated and 200m perpetual bonds will fare even worse, receiving only 9% of par if they opt for cash.
While in theory investors can decline to participate in the offer, Piraeus has made it clear that burden-sharing "to the maximum extent possible" is on the cards if they do.
"What's happening with Piraeus is in line with what we always thought would happen and the expectation that you'd have burden-sharing in Greece before bail-in officially comes in," a senior debt capital markets banker said.
"It's very clear from the offering memorandum that investors take part in the exchange or get nothing. The problem is that no one knows what the capital hole is and Greek banks are a big political black box."
His view was shared by an analyst at a hedge fund. He described the exchange as coercive given investors who don't participate could be squeezed out, as the bank is also conducting a consent solicitation alongside the exchange to change the terms of the debt.
"It's quite likely that investors will have to give their instructions to the clearing house before the results of the stress tests are known," he said.
The results of the Greek bank stress tests are expected on October 31 ahead of the expiration deadline for the exchange on November 4.
In a note published in July, RBS analysts said that in a worst case outcome, the total capital shortfall could be as high as 27.4bn.
While the cash option appears to hit investors hard, the bank has also given them the option of taking shares instead. That would potentially offer some recovery value if the lender gets back on its feet.
Bondholders can opt for shares with a 100% ratio in the case of the 2016 sub and 2017 senior deals, and 50% in the case of the perpetual securities.
Another hedge fund investor suggested this was likely to be investors' preferred course of action.
"The cash offering is stupid; I think it's a bluff," he said. "No one will take 43 given where the bonds are trading. However the way the share option has been structured means that you can participate in the equity raise."
Piraeus's 2017 issue was bid at a cash price of 51.2 on Thursday afternoon, according to Tradeweb prices, up almost five points from where it opened the session.
Burden-sharing of subordinated debt is not new in Europe, but senior debt - with the exception of depositors in Cyprus - has so far been left untouched,
"What happened in Ireland is the closest case to what is happening in Greece now, although then a lot of it was rhetoric," said another banker. "Here, bail-in is a real threat and if this bank is not equitised, there will be a resolution and someone else will decide your fate."
Deutsche Bank and UBS are structuring banks and dealer managers. Credit Suisse is dealer manager. (Reporting by Helene Durand, Additional reporting by Robert Smith, Editing by Sudip Roy, Julian Baker)