Final auction results | FT Alphaville

Final auction results

The Greece CDS auction is over!!

The final price for Greek bonds was set at 21.5, meaning that every buyer of $10m CDS protection on a default of the Hellenic Republic can expect a payout of $7.85m cash. Full results here and this is the headline:

The first stage of the auction revealed a net open interest to sell of €291.6m, meaning that investors and banks wanted to offload Greek bonds more than they wanted to pile them up. This was hardly surprising.

The bids from the first round were bought forward, but with quote sizes of just €5m (a standard amount decided on before the auction), those were never going to be enough — the limit orders of stage two were needed.

In stepped JP Morgan, Citigroup, HSBC, and Barclays with big bids that made up the bulk of the demand to buy up the excess supply.

But who is willing to buy anyway? Over again to Michael Hampden-Turner of Citi, from his note on Friday:

Greek banks might be natural buyers of the new bonds on offer, but it seems unlikely they will be bidding in size ahead of their bailouts. Moreover, many of these holders will probably not be familiar enough with CDS auctions to want to use the opportunity either to buy or sell large quantities of bonds, or at least be nervous enough of the unusual mechanics to be cautious. Therefore, the most significant investor buying or selling will probably be French, German, UK or international banks as well as non-banks. On balance we think these investors will be under less pressure than before to hold Greek bonds and are more likely to use the opportunity to sell, rather than buy, more assets.

Big buyers of defaulted debt may also be less active than usual in this auction. Distressed debt investors tend to prefer recovery plays which are more dependent on micro-analysis than the politics of the EU, ECB, IMF and Greek government. Equally, the new bonds that are likely to be delivered are long dated, with a small 2% coupon. This is likely to prove an unattractive combination for many distressed investors, who typically prefer high coupons and short maturities, potentially reducing the size of the bid that one might otherwise expect.

On balance, therefore, we think there is more potential for a squeeze down in price than a squeeze up.

All-in, with little appetite from well… anyone obvious to buy more Greek bonds, the expectation was for low 20s, and so the this result was in line.

All those involved should, presumably, breathe a sigh of relief that the result isn’t far off compensating protection buyers for the loss to net present value they would have suffered if they were holding Greek bonds to begin with.

Even if it isn’t definitely over for the Greece CDS issue, as there may have been holdouts, this will have taken care of the majority of trades.

Isda, we’ll see you at the bar.

Credit traders, back to your desks immediately, there’s an index roll tomorrow. (That is, the main iTraxx indices “roll” to a new series, whereby the constituents are shuffled in order to conform with the rules. Since Greece is out of the iTraxx SovX Western Europe, for example, Cyprus is going in. The indices are themselves tradeable products.)

Related links:
[Credit event auctions] Why do they exist?A necessary condition for growthMechanicsGreece CDS payout cheatsheet – FT Alphaville
Ok guys, hands up who booked the weird Greece CDS trades… – FT Alphaville