Tag Archives: Greek GDP linked warrant

Update Greek GDP Linker (ISIN GRR000000010) – research mistake or by-product of value investing principles ?

Last year I had a couple of posts about the (in)famous Greek GDP linker (introduction, valuation approach) a result of the “restructuring” of Greek debt last year.

I concluded that the security is fundamentally worthless and criticised in August 2012 a post by FT’s John Dizzard recommending the linker at 33 cents. In the last few weeks and months, I recognized increasing clicks on my old articles and I even got an Email from a UK based hedge fund manager asking for the prospectus.

So its time to look at the score between me and the FT since I wrote that post:

Holy cow !!! The price of this security tripled since I made fun of the FT. guy, so I would say 3 for the FT, nil for me.

First lesson learned: I was clearly wrong on that one for the time being. If you followed the FTs advise, you made big bucks in only a year. if you have followed my advice you made nothing.

So whenever I see one of my analysis going wrong so horrible, I keep asking myself: Was I wrong or ist the market (price) wrong ?

Let’s go back to the fundamental analysis and see if something has changed to the better in the meantime ?

Well, the Greek stock exchange doubled, but as we know for the analysis, for the GDP linker the only two things that count are: Nominal value of GDP and GDP growth rates. Let’s look at the hardest hurdle which in my opinion is nominal GDP.

Those are the levels of nominal GDP required to get a single cent out of this security:

year nominal GDP yoy
2014 210.1  
2015 217.9 3.71%
2016 226.4 3.90%
2017 235.7 4.11%
2018 245.5 4.16%
2019 255.9 4.24%
2020 266.47 4.13%
therafter 266.47 0.00%

So again, let’s go to the original Greek statistics website and do a quick update on Greek GDP including 2012:

Year GDP
2000 136,281
2001 146,428
2002 156,615
2003 172,431
2004 185,266
2005 193,050
2006 208,622
2007 223,160
2008* 233,198
2009* 231,081
2010* 222,151
2011* 208,532
2012* 193,749

So we can clearly see that nominal GDP decreased quite dramatically. For 2013 it doesn’t seem to get much better. If we look at the last quarter, we can see that in Q1, Greek GDP decreased ~ 7% on market prices basis.

So lets just assume that things pick up in the rest of the year and the Greek GDP shrinks only by -5%. That would leave us with a GDP of around 184 bn. Now we can easily calculate what kind of compound annual growth rates (CAGR) Greece needs in order for the GDP linker to “jump” the nominal GDP hurdle:

Hurdle Actual CAGR required
2013   184  
2014 210.1   14.2%
2015 217.9   8.82%
2016 226.4   7.16%
2017 235.7   6.39%
2018 245.5   5.94%
2019 255.9   5.65%
2020 266.47   5.43%

This table can be read as follows: In order to hit the GDP hurdle in 2014 (and receive money in 2015), Greek GDP has to rise 14% in 2014. Or: in order to hit the hurdle in 2015 (and get paid in 2016), the Greek GDP has to have a compound growth rate of 8.8% in 2014 and 2015.

Now it is clearly open to discussion how likely that is. I would however argue fundamentally this is more or less impossible because Greek is under a lot of deflationary pressure.

So the fundamental outlook didn’t really improve from last year, but why the hell did the linker trade up so much ?

I have a few explanations:

a) The linker looks optically cheap. It “officially” trades at 1.1% of nominal value, so for many investors that means it trades “for almost nothing”. In the post last year I mentioned, that the quotation is highly misleading. As the maximum cash (undiscounted) you get is around 18% of the stated “nominal”, the linker is in fact trading rather at 1.2/18= 6.7% of nominal, not adjusting for coupons. So still “cheap” but not so cheap as some investors think.

b) Argentinian experience: Argentinian GDP linker have been a very good investment. However part of that was that Argentina could inflate its economy because they have their own currency. Greece can not inflate in EUR, instead they have to deflate salaries, costs etc. This is fundamentally different to Argentina.

c) People are betting on some kind of Greek recovery and use the GDP linker as a levered proxy for a Greek recovery without really understanding it.

Of course, my fundamental analysis could be all wrong and I missed something. However I woudl need to read something fundamentally justified to accept this. If someone knows something about such a piece of research, please let me know !!!

Summary (and implications for value investing):

I was clearly wrong about the future price of the GDP linker last year. However I am still convinced that I am right on the ultimate “value” of this GDP linker which is close to zero. So one could see this as a weakness of the “value investing” approach because I never consider that someone might pay a higher price despite the value of this security being close to zero.

And clearly, as a value investor you rarely share in “speculative gains” but on the other hand, you also avoid many speculative losses if you really stick to your strategy.

This is also one of the biggest mistakes (and one of the hardest parts of the startegy) I see with some value investors: It is really hard to resist the urge to “speculate” at some point in time. Our mind often plays tricks on us that we can recall great trades much easier than bad trades. But i think that mixing in speculations (investments not based on intrinsic value but based on the hope that someone buys it even more expensive) into a value investing strategy might be the biggest “detractor” for a superior long term performance.

For every GDP linker you miss out as a value investor, you also miss out a couple of “bad trades” and in my experience the balance of those missed out trades is negative (or positive for your performance) over the cycle.

There are clearly people who are great “speculators” and got rich with that (Soros & Co), but for every successful speculator, there is a large graveyard of bankrupt losers. Whereas I don’t know that many bankrupt value investors…..

Bad research example: FT’s John Dizard and the Greek GDP linker

I was quite surprised that my old Greek GDP warrant post got hit a lot in the last few days.

By coincidence I just saw that on Monday, a guy called John Dizard recommended the GDP linker as a “great bet on Greek long-term growth”.

You have to register in order to read the article online, but although its almost a half page in the print FFm supplement, the essence is the following:

– the Argentinian linkers were a great deal
– the Greek linkers are cheap (30 cents)

In my opinion, he makes some plain wrong statements like:

“The Greek GDP warrants could begin to pay out in 2015, based on the country having experienced a minimal recovery by then”

.

As I have mentioned in the post, Greece needs to hit the 2011 nominal GDP (in EUR) by 2014, to get any payout in 2015. In 2012, I think Greece is running at around -7%. So Greek needs nominal increases in GDP by at least north of 3.5% both in 2013 and 2014 to hit this trigger. I am not sure if this could be called a “minimal” recovery.

I am not sure what happens if Greece leaves the EUR, but I would assume that the Linkers would only pay if EUR GDP is triggered, not “new Drachma” GDP.

He then goes on and says the following:

“Right now they trade at about 32 or 33 cents, which means that is what you pay for the possibility of receiving one euro in 2015”.

Again, no points. The 33 cents represent the chance that you get any cash flow over the next 30 years. I am pretty sure that Mr. Dizard never really to bothered reading the prospectus, he will be busy writing his next “analysis”.

Finally he quotes a trader who says “the discount rate on future payments is just to high”. This is of course bullshit as well. Normal “non optional” Greek Government bonds trade at 20% yield p.a. If one discounts the cashlofs without taking the options into account, one ends up with a “bond equivalent” value of 3.28%. So you are paying at 33 cent an option premium” of 10% for the bond equivalent market value which is not cheap in my opinion.

Summary: So maybe it turns out that the Greek linker is a good investment. But if it does, it is certainly not for the reasons this genius has identified. My advice would be for people who want to speculate on Greece’s future to buy the GGBs instead. At 15% of nominal, they have enough “optionality” and upside in the good case. Or you buy shares like OPAP if you want to mitigate the Sovereign default risk. Optionality wherever you look.

Edit: At least the article moved the price up by 10-15% for the linker. This is the advantage of writing for the FT.

Exotic securities: “Detachable GDP linked Greek warant” (ISIN GRR000000010)

Yiiihaaa, this Monday was the first day this “beauty” is trading. As mentioned before, this is a security which is part of the “PSI package”.

As one could expect, this security is mind boggingly complex. As far as I understand, the features are as follows:

1. The max payout is 1% per year based on the nominal value
2. the first potential payment date will be 15th October 2015
4. The nominal Value will amortise after year 2022 to zero in year 2043
3. In order to trigger the payout, two principle conditions have to apply (apart from Greece not being not bankrupt)
a) the greek GDP has to be abvove a certain specified nominal amount
b) the growth rate of the real Greek GDP has to be aboev a certain specified rate
4. The Greek Government can “call” the warrants anytime from 2020 on based on a 30 day trailing market price

The specified nominal GDP hurdle for 2014 is 210 billion and increases to 260 bn EUR in 2020. Through Google I found an estimated GDP number for 2011 of 310 bn USD or ~ 238 mn EUr for 2011, so they could shrink further to a certain extent and still be above the trigger. Currently, GDP shrinks at -5.5 nominal rate. Two years with this rate would bring as very close to the trigger level.

The required real growth rates are in the area of ~2.35 to 2.8% in the first few years and then 2% thereafter.

I haven’t built a model yet, but from a theoretical point of view it will be a really fun exercise.

Market prices:

On monday the first trades on the German Exchange were ~1.25 % of nominal value, at the moment small lots are traded at 0.95 EUR. The lowest trades were executed at 0.85 EUR. The broker quotes I see are something like 0.75/1.00 so the banks don’t seem to be keen to make a market.

So let’s wait and see how this develoipes. In any case I always find it big fun to look at such “exotics”….