How Greek Premier Got Back on the Bond Wagon With Dimon's Help
Shut out of international bond markets for four years, Greek Prime Minister Antonis Samaras wasn’t going to take any chances with his country’s return.
He began months ago lining up investors for the April 10 debt sale, which proved irresistible to the likes of BlackRock Inc. and Invesco Ltd. (IVZ) The keystone for his pitch was a September meeting with investors at JPMorgan Chase & Co.’s headquarters in Manhattan hosted by Chief Executive Officer Jamie Dimon, according to two people with knowledge of the matter, who asked not to be identified because the event was private.
The charm offensive paved the way for a 3 billion-euro ($4.2 billion) offering that drew orders for almost seven times that amount. While the nation remains blighted by deflation and the highest unemployment in Europe, the sale underscored Greece’s strengthening ties across the euro area as it seeks to overcome the stigma of starting a region-wide financial crisis and carrying out the biggest-ever restructuring.
“This trade is not without risk,” Mark Nash, a London-based money manager at Invesco, which oversees $787 billion including $177 billion of fixed-income assets, said in a telephone interview on April 17 after buying the new government notes. “It relies on European growth continuing to improve. The fundamentals in Greece are not terribly rosy, but there’s no doubt they are doing a lot better.”
Joining Invesco among the buyers of the new five-year securities were New York-based Greylock Capital Management LLC, which oversees $850 million, and Legal & General Investment Management, with the equivalent of $758 billion.
BlackRock, the world’s largest money manager with $4 trillion in long-term assets, also invested in the notes, according to a person familiar with the matter. Brian Beades, a spokesman for the New York-based firm, declined to comment when contacted April 21.
Greek bonds returned more than 400 percent since June 2012, the month Samaras came to power, according to Bloomberg World Bond Indexes, more than any technology stock in the Standard & Poor’s 500 Index. Ten-year Greek yields touched the lowest level since February 2010 this month and Samaras said in an interview in Athens last week that he expected rates to continue falling and that his country was in no rush to tap the markets again.
Having carried out the sale via banks including JPMorgan, rather than at an auction, to help ensure demand, Greece agreed to a yield of 4.95 percent on the securities. It received bids exceeding 20 billion euros, enabling the nation to raise more than the 2.5 billion euros it initially sought, Samaras said in a televised address that day.
Almost half the debt went to investors based in the U.K. and a third was allocated to those from the rest of Europe, according to a statement from the Athens-based Finance Ministry.
“International markets are now expressing in the most undoubted way possible their confidence in the Greek economy,” Samaras, 62, said in the televised comments.
The timing of the sale enabled Greece to tap into a rally across the euro area that’s driven governments’ borrowing costs to record lows.
The average yield to maturity on debt from Greece, Ireland, Italy, Portugal and Spain fell to 2.19 percent yesterday, the lowest since at least 1998, according to Bank of America Merrill Lynch indexes. The yield climbed as high as 9.55 percent in 2011 as the sovereign-debt crisis threatened to blow the currency bloc apart. A measure of all euro-area government bonds reached a record-low yield of 1.55 percent last week.
Investors started to return to markets they shunned during the region’s debt crisis after a July 2012 pledge by European Central Bank President Mario Draghi to do whatever was needed to keep the currency bloc together. Adding to the case for a recovery, Europe’s policy makers have put in place new systems that centralize bank supervision and build firewalls between troubled debtors and taxpayers.
Now bondholders are speculating the ECB will either tolerate inflation that’s slowed to a four-year low, preserving the purchasing power of the fixed payments on bonds, or unleash a debt-purchase program to fend off the risk of deflation.
“It will eventually get to the stage where the market demands some affirmative action rather than just the rhetoric” from the ECB, Richard Hodges, a fixed-income money manager at Legal & General in London, said in a phone interview on April 14. This “seems to have driven some of the periphery to the levels at which they are today,” he said, referring to the region’s high-debt and deficit nations.
Hodges bought about 30 million euros of the new five-year Greek bonds for the Legal & General Dynamic Bond Trust (LGDNBAA) he runs, he said. That amounts to about 1 percent of the fund and, while other money managers at Legal & General also bought the securities, this was the largest purchase, he said. His fund returned 11 percent in the past five years and is in the 94th percentile of its peers, data compiled by Bloomberg show.
Demand for Greece’s notes was led by “real money investors,” or those that use existing funds rather than borrowed cash for the investments, according to the Finance Ministry. Asset managers purchased 49 percent of the debt and hedge funds bought 33 percent, it said. Pension and insurance funds were allocated 4 percent and banks took 14 percent.
The yield on the new April 2019 notes climbed to 5.16 percent on April 14 before falling to 4.82 percent at 1:25 p.m. London time today.
Frankfurt-based ACATIS IfK Value Renten UI (ACIFKVR) sold the 3 million euros of notes it bought in the first hour of trading on April 11 at 4.85 percent, making a “small profit,” according to Martin Wilhelm, who helps manage about 400 million euros for the fund.
“We still own about 7 million euros of the 2029 bonds,” he said in a phone interview on April 17. “It is better to buy Greece than buy Spain, as they carry about the same story.”
Greek government securities returned 30 percent this year through April 22, more than double the next-best performance among the 34 sovereign markets tracked by the Bloomberg World Bond Indexes, extending their world-beating returns into a third year. Spain’s earned 7 percent.
The yield on the Greek benchmark 10-year bond was at 6.11 percent today, having fallen from more than 8 percent at the start of the year. The price of the 2 percent securities maturing in February 2024 was at 79.5 cents on the euro, up from 25.5 when they were created under the 2012 debt restructuring that saw investors accept losses of more than 100 billion euros.
Spain’s 10-year rate was at 3.08 percent, having fallen to 3.039 percent yesterday, the lowest since 2005. Ten-year German bunds, Europe’s benchmark government debt, yielded 1.54 percent.
Greece, the country that sparked Europe’s debt crisis in 2009 after saying its deficit was bigger than previously thought, hadn’t sold bonds since March 2010.
In April 2010, then-Prime Minister George Papandreou called for the activation of a financial lifeline for the nation, an unprecedented test of the euro’s stability.
In total, Greece received 240 billion euros in aid commitments under two financial rescues. The country persuaded bondholders to swap existing securities for new bonds maturing between 2023 and 2042, resulting in a 53.5 percent writedown of their holdings, under the 2012 restructuring.
Not all investors were convinced Greece’s progress has come far enough to warrant yields below 5 percent on the notes. Insight Investment Management Ltd., Kleinwort Benson Bank, Natixis Asset Management and Skagen AS, which together oversee almost $900 billion, were among investors that shunned the sale.
“The pricing was not attractive on the basis of volatility,” Fadi Zaher, the head of bonds and currencies at Kleinwort Benson Bank in London, which oversees $8.9 billion, said in an April 15 interview. “We buy to hold for some time and my biggest fear was that there would be a lot of hot money coming into this deal, which will leave after the issue.”
Greece lost a quarter of its economic output during a six-year recession, unemployment is just shy of 27 percent and consumer prices fell 1.5 percent in March from a year ago. The country’s debt pile was 175.1 percent of gross domestic product in 2013, up from 157.2 percent a year earlier, the European Union’s statistics office in Luxembourg said yesterday.
“The challenges are extremely large,” Axel Botte, a Paris-based fixed-income strategist at Natixis, said in an April 15 interview. “The 2019 bond came in below 5 percent, which clearly understates the credit risk of Greece. We will shy away from buying Greek bonds at this stage.”
These were among the concerns Samaras faced at the investor meeting in New York in September. The Greek prime minister had already met with Dimon in August, when he was in the U.S. to meet President Barack Obama, according to a person with knowledge of the matter.
JPMorgan’s Dimon, whose paternal grandfather migrated to the U.S. after working as a banker in Athens, kicked off proceedings at the September meeting with supportive words for Samaras and his efforts to turn Greece around, according to one of the people familiar with the events. Samaras then made his case to the money managers in attendance on why they should invest in the nation.
“It is in everyone’s best interest to help Greece recover and thrive, and we at JPMorgan are pleased to do our part,” Dimon, 58, said in an e-mailed statement two days ago. The Greek prime minister’s office wasn’t available for comment yesterday.
Samaras stressed at the meeting that relations were good with the ECB, the International Monetary Fund and the European Commission, whose rescue funds saved Greece from collapse. Continued good standing with the group, known as the troika, is pivotal to the country making its bond payments.
The country won approval this month from euro-area members for an 8.3 billion-euro aid payment, the first disbursement from its bailout program since December. The European Commission forecasts that Greece’s gross domestic product will expand 0.6 percent in 2014 after six consecutive years of contraction.
Greece recorded a primary budget surplus, which excludes interest and one-time payments, of 1.5 billion euros last year, the European Commission said yesterday. Euro-area finance ministers said in November 2012 that when the government in Athens registered a surplus, they would “consider further measures and assistance” to help Greece meet the targets set out in its rescue-aid agreement.
Greylock Chief Executive Officer Hans Humes says he took part in the sales process, betting Greece’s economic recovery would continue. His hedge fund was among those that made money by buying Greek bonds in 2012 on speculation that European officials would prevent the euro-area debt crisis from spreading.
“We have been a big believer in the reforms and the fact that the economy has turned around,” Humes said in a phone interview on April 21. “Given the fact we’ve been so tied into the story, and we’re so supportive of what Greece is doing, of course we’re going to be coming in with a relatively large order.”
While the company has been trimming its holdings of Greek bonds since last year after the prices increased, it would “probably participate” in future offerings and has also looked at Greek corporate debt, Humes said.
National Bank of Greece SA, the country’s biggest lender, is selling 750 million euros of five-year notes priced to yield 4.5 percent, according to a person familiar with the matter, who asked not to be identified. It will follow Piraeus Bank SA, which last month held the first public sale of debt by a Greek financial company since 2009, according to data compiled by Bloomberg.
Eurobank Ergasias SA, Greece’s third-biggest lender by assets, will seek to sell 2.86 billion euros of shares before the end of the month to plug a capital hole identified in an asset quality review, it said last week. Piraeus Bank and Alpha Bank A.E. last month raised nearly 3 billion euros, mostly from foreign investors, to bolster capital.
The return of confidence is being reflected in the freshly relaid marble paving stones on Syntagma Square, Athens, the site of pitched battles between police and protesters during the worst of Greece’s crisis. Finance Minister Yannis Stournaras said he replaced in February a window of his office that had been damaged by a bullet in one of the riots, judging that the era of upheaval had ended.
The investor rush for the sovereign bonds sold this month left some, including Sturgeon Capital, unable to buy the notes.
“To come in the market and pay close to 5 percent is a good first step,” Yannick Naud, a London-based money manager at the fund, which manages $190 million in assets, said in an April 15 interview. “We see continuous inflows into euro-zone periphery, and within the euro zone from core to periphery, as investors are chasing yield. I’m convinced we will see some new issues from Greece at shorter maturities, where the yield will be much lower.”
When prices on the newly issued debt dropped in the aftermath of the sale, Invesco’s Nash bought more.
“There’s a lot of demand for sovereigns at the moment and, quite simply, the yields on offer are very low,” he said. “It’s all relative. You’re getting very little elsewhere, so we do like this trade at the moment. But if we see anything jeopardizing it, we would look to exit.”
To contact the reporters on this story: Jesse Westbrook in London at email@example.com; Eshe Nelson in London at firstname.lastname@example.org; Nikos Chrysoloras in Athens at email@example.com