Regular readers of my columns and blogs may have wondered why I haven’t weighed in on the Greece saga. In truth, even after Greece went into arrears with the IMF yesterday. I have very little to add to the tidal wave of coverage. It’s also such a heavily politicised matter that any comment ultimately becomes a political one.
And frankly the interplay between the ideological mind-games of Alexis Tsipras and the equally ideologically-inspired mind-games of the EU is just somewhere I haven’t felt qualified to go and I’m certainly not going to pretend. The situation is grave, but even so the Armageddon-style impact of the non-payment of the IMF loan as painted by a sensationalist media always looked like it was being overplayed.
The fact there’s no default, no triggering of CDS kind of puts it into perspective. That’s not, of course, to suggest there won’t be a declaration of sovereign default at some point as further debt payments come due and are missed. But at the same time you just can’t rule out some sort of deal being struck even now.
As an EM hand of old, I’m still disappointed that Greece didn’t do a Brady-style debt restructuring, which 17 countries successfully did from the end of the 1980s and into the 1990s.
The menu of Par Bonds, Discount Bonds, Debt Conversion Bonds/New Money Bonds, Capitalisation Bonds (C-Bonds), Front-Loaded Interest Reduction Bonds, Eligible Interest Bonds, Floating-Rate Bonds, Interest Arrears Bonds and Past Due Interest Bonds – remember those? – offered up a wide range of innovative and tradable entry, exit and new-money options around principal as well as interest arrears situations.
A lively options market built up around the underlying bonds, so you were able to engage in bond price as well as non-directional implied volatility plays. I’d written about a benefits of a Greece Brady restructuring back in April 2011 so no need to recycle. Suffice to say, the lack of a range of truly open-market price-setting mechanisms to enable private-sector investors of all hues to express a view around Greece has been frustrating.
Let’s face it, the ability of buyers and sellers to express a view and the willingness of brokers to stand in the middle lies at the core of the function and utility of capital markets intermediation.
Case in point: IFR regularly publishes a table of debt prices, including from some toe-curlingly exotic places, courtesy of hyper-exotic specialist WesBruin Capital. (Click here, to see the Exotic Debt Prices table to see what I mean.)
If I can bid 5.5 cents of par for yen Cuba paper (cheap as US-Cuba relations start to normalise?), half a cent to gain exposure to Central African Republic past-due trade debt, four cents for Congo, seven cents on North Korea or as little as 45 cents for Kenya trade paper (surely worth a punt to get into go-go East Africa), why can’t I get a price on a wide range of still-EU member Greece debt options? It’s surely a missed opportunity.
Meanwhile in Italy
Away from Greece but still on the subject of distressed debt, I note that the deal between KKR, UniCredit, Intesa Sanpaolo and Alvarez & Marsal to manage a portfolio of Italian NPLs was finally struck in the past week, some 15 months after they started negotiating.
As I’d written in February 2015, Italian NPL portfolio sales have been hot hot and an army of distressed debt and work-out specialists, hedge funds and private equity firms has decamped to Italy either to buy outright the situations the banks want either to get rid of, or co-manage pooled portfolios through third-party platforms where the banks can outsource the work-out process and share in any upside.
That’s the route KKR has taken with the establishment of its pan-European platform, where Italy’s two biggest banks are its first customers. KKR and A&M (the latter acting a preferred service provider) will manage the underlying non-core or under-performing situations to seek resolution and put them a sounder footing. The banks, meanwhile, keep the assets on their books. In the event an asset sale becomes a favoured option, having isolated the underlying assets and pooling them on one platform becomes a facilitating tool. Looks like a neat solution.
KKR, A&M and the banks are starting out small on this Italian project – loans transferred will initially be worth up to €1bn – but KKR notes that there are €1.9trn of non-performing and non-core assets on the balance sheets of European banks, €1.2trn of which are non-performing. That certainly implies room for expansion; the platform is open to other banks. The new platform will be run by Andrea Giovanelli, UniCredit’s head of large corporate restructuring.
On the basis of a recent report from Scope Ratings, though, they will have their work cut out. Scope said that Italian NPLs – €187bn at the end of February – are still increasing at a rate of 16% per annum, a four-fold increase since 2008. The rating agency said it expects the fall in NPL ratios in Italy to take longer due to structural factors that hinder insolvency resolution, including “a dysfunctional system of contract enforcement and a lengthy and expensive process for corporate insolvency”.
This means, the agency continued, resolving an insolvency process in Italy takes on average 1.8 years, roughly in line with Portugal and France, but higher than most European countries, with only Greece taking longer. It’ll be interesting to see if the KKR venture can better that.
In my February piece about Italian NPLs, incidentally, I’d noted that the calculations of the quantum of Italian bad debt ranged from €166bn all the way up to €333bn and I couldn’t reconcile the numbers. But a very kind soul put me out of my misery, pointing out that there are four categories of impairment in Italy: sofferenze (the most serious category), incagli (literally meaning ‘stuck’), ristrutturati (restructured) and scaduti (past-due). The lower number refers just to sofferenze while the bigger one refers to the aggregate of all four categories. So there you have it.
Oh and by way of conclusion, and in case you were wondering, I’m not for a moment suggesting that Greece is on a par with the countries in WesBruin’s exotic list; I was just making a point around the market’s ability to find price makers and takers up and down and spectrum to unleash the fundamental laws of relative advantage.
That said, I’m happy to take a leaf out of KKR’s book and bid Christine Lagarde a couple of cents to take a small co-investment slot on her impaired loan to Greece.
