Standard & Poor’s recently announced its decision to upgrade Greek sovereign debt by six notches, a significant move and further support for the rally in global credit markets that has been underway since the summer, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“Concerns about a ‘Grexit’ (possible Greek Exit from Eurozone), which flared up in May, interfered with the credit rally that had been under way since Q4 2011,” says Rodilosso. “Since then, US elections, the fiscal cliff, and concerns over China’s slowing growth and its change in leadership have also been issues that weighed on market sentiment. But Greece, as insignificant as it might be as a standalone economy, has remained a potent symbol of the Eurozone’s failures and its potential for unraveling, and held an outsized role as a significant driver of global sentiment.”
“As for S&P’s upgrade, it makes sense to me since it is based on the depth of support on display from Greece’s neighbors,” says Rodilosso. “But the country’s absolute level of debt, even as projected out 10 years, is still frightening in my view.”
“While we do not focus on the Greek sovereign paper in any of our ETFs, we have still noted that there may be opportunities to be found among corporate bonds,” he continued. “OTE (Hellenic Telecom), which we own in our passive Market Vectors International High Yield Bond ETF (IHY), is one such issuance. The OTE story was arguably a compelling one even in a ‘Grexit’ scenario as it has disclosed significant and profitable assets outside Greece, loans from Greek banks that might be ‘drachma-ized’ in an exit scenario, a relatively strong foreign shareholder base, and a domestic business unit that has held up well. OTE’s 2014 bonds have recovered in price by approximately 65 percent since May, when they traded at 60 cents on the dollar.”
“Even amid a potential sovereign disaster, there are often some very good companies whose debt might have better recovery value than sovereigns in a worst case scenario and which also might be had at bargain prices when the news is most grim,” says Rodilosso.
