The Greek collateral grab — a credit event after all?

The latest in Finland’s mooted deal to get cash collateral from its part of the Greek bailout — well, maybe, Finland will change the deal after all. That’s after other lenders moaned about special treatment.

(A certain Darth Vader quote comes to mind…)

Though Finland still wants collateral in some form. And it cannot be forgotten that it managed to strike up an agreement with Greece in the first place. An agreement which received a tacit nod of approval from the July 21 eurozone deal on the new Greek bailout.

The fact that Finland still wants collateral matters, in that there are still English-law Greek bonds out there which might easily default if this collateral counts as Greece securing “external indebtedness” on terms above these notes. We’ve noted language in the circular of one €450m floating rate note maturing in 2012 to this effect. Moody’s is warning about Greece facing a huge default on all its payments if the collateral issue delays the bailout, but we increasingly think there’s a budding event of default in these notes. It would take a holder of this bond (plus doubtless an army of lawyers) to decide on this “external indebtedness” issue and notify Greece to set the ball rolling however. That’s not likely to happen while the eurozone takes its sweet time in tearing itself apart over the legitimacy or terms of this cash collateral.

But, the fact that an agreement already exists also matters, because this might not just be a credit event for Greece CDS separate from a default in the bonds. In fact the conditions for the credit event might have been in place as soon as Finland’s finance minister went around hooting about the collateral deal last week.

Although it’s not a type of credit event many have come across.

A standard CDS contract for a Western European sovereign contains only three credit events: failure to pay, restructuring or moratorium.

Reader Yogi Bear originally pointed out to us that Greece is probably not subject to an Obligation Acceleration credit event therefore. (The foreign-law bonds require payments to accelerate in a default, which suggested this credit event might apply.) Of course it’s not impossible for there to be old or bespoke contracts containing this credit event – but in any case, you would have to wait for the bonds to default and accelerate payments. Even eurozone leaders couldn’t be so stupid as to let Finnish politics actually trigger a Greek default after all the pain taken to construct a voluntary bond swap, you might think, so would move to prevent an acceleration of obligations at all costs.

Although they have been stupid enough to let Finland get this far.

Presenting, then, the Obligation Default credit event.

According to the Isda 2003 credit derivatives definitions, an Obligation Default credit event is triggered when obligations…

…become capable of being declared due and payable before they would otherwise have been due and payable as a result of, or on the basis of, the occurrence of a default, event of default or other similar condition or event (however described), other than a failure to make any required payment, in respect of a Reference Entity under one or more Obligations

(Obligation Default and Obligation Acceleration can’t apply to the same CDS contract, in case you’re wondering.)

It’s a very interesting spot by Yogi Bear.

It’s quite broad as a definition. So broad, in fact, we suspect it might be one reason why Obligation Default credit events are rarely found in modern CDS contracts. You’d be a bit nervous of selling any such contract. So rare might these events be, that Isda’s determinations committee for credit events doesn’t even list Obligation Default as a query option on its website (we assume it comes under “Other”):

But there may well be such a contract gathering dust in a shady corner of Mayfair or Connecticut. A contract on Greece.

As Yogi Bear notes, the key issue is what ‘become capable of’ means within what is publicly known about the Finnish deal with Greece. It remains the case, whatever happens to the deal next, that Finland’s finance minster declared an agreement on collateral. Remember the threshold for a credit event query is a publicly available source (two, technically). If you think there’s no way a mere ministerial statement could trigger a credit event, there is a weird echo in Argentina. We’ve heard before of official statements on the possibility of restructuring that actually led to queries on credit events while the country veered towards default in 2001.

That’s assuming that the breach of obligation dates from the initial statement that Greece will secure the Finnish (portion of the EFSF) loan. As Yogi Bear points out, the terms of the 2012 FRN provide that for an event of default, Greece must be in breach of obligations…

…and continue to be in default for 30 days after written notice thereof shall have been given to the Republic by the holder of any note

There are other foreign-law bonds where it has to be 25 per cent of holders, though in this one it’s any holder.

Thus, it might come to a holder putting his or her head above the parapet to notify Greece. Same as a CDS holder might stick their head above the parapet in order to query the Isda determinations committee. You might not bother to do the latter if you’d actually expect Greece to undergo a failure to pay or restructuring credit event in the near future anyway (maybe pay-offs or deliverable obligations under the contract are different, for example) and any contract containing an Obligation Default credit event is likely to be rare indeed, as we’ve noted.

But from this angle, there appears to be no outright obstacle to holders challenging this collateral deal. In fact we’ll be amazed if Greece and the eurozone avoid a challenge.

Holder information for the 2012 FRN is not easy to come by, but a simple HDS search on Bloomberg showed that Eurobank EFG held about €32m in several portfolios as late as the end of July, at least. We’ll be checking other foreign-law bonds as we go (and if you’re a lucky holder of a likely suspect yourself, on the off chance, do get in touch…)

Oh, and we’ll be checking to see if any other Greek bonds feature cross-default provisions as well.

This could get messy.

(Massive hat-tip to Yogi Bear)

Related links:
More on the Greek collateral grab – FT Alphaville
Moody’s not pleased with Greek collateral grab – FT Alphaville
Greco-Finnish deal reopens bail-out debate – FT

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