Talk about looking for best investments in the most unlikely places...
The bad economic news out of Greece has dominated the headlines for several years now. As the country tries to work its way back to prosperity, a solvent banking system is going to be critical to the process. Banks have seen their capital base shrink from bond haircuts, bad loans and depositors withdrawing money to get it outside the beleaguered nation's banking system.
As part of its plan to restore the nation's fiscal health, Greece has told the banks they need to complete a recapitalization plan that raises Tier 1 capital ratios by 9%. This should increase their solvency and allow the nation to receive further bailout funds from the European Union.
Restored capital levels should help the banks regain access to interbank markets and provide the liquidity needed to help push the economy back on track.
As the troubled nation of Greece is in the process of recapitalizing its banks, hedge funds around the world are rushing to participate.
Hedge funds are hurrying to buy equity and debt because they have seen the profit potential before on several occasions.
You see, when distressed nations begin to capitalize the banks and sovereign debt, it has led to huge gains in the underlying securities. As far back as the early 1990s the restructuring of debt and the banking system resulted in huge gains for those funds willing to withstand the volatility and risk of the workout process.
Those who helped fund the bailout of Asian banks in the late 1990s also scored returns of four to five times their original investment. Distressed and value investors such as Wilbur Ross and Prem Watsa have enjoyed large gains as a result of helping recapitalize Irish banks in the past few years.
More recently here in the United States, investors - including the U.S. taxpayers, who participated in the restructuring of our banking system in 2008 and 2009 - have reaped enormous profits.
The early investors in this process stand to earn returns of many times their original investment capital if the combination of austerity measures and financial restructuring are successful over the next several years. This isn't a short-term commitment, nor is it for the faint of heart, but the potential rewards for the funds that step up to the plate at this early stage make Greek banks one of the best investments for those who can handle the volatility and patience.
Best Investments for a Greek Bank Play
Hedge funds have been bottom fishing in Greece for the last year or so. Both Daniel Loeb's Third Point Partners and Seth Klarmans Baupost Fund have scored huge gains in Greek government debt.
The largest lender in Greece, National Bank of Greece (NYSE ADR: NBG) recently announced its recap plans and it has been well received by the markets so far.
The bank received shareholder approval of a $12.75 billion capital raise that will allow it to stay in public hands rather than fall under full government control. A good deal of the funds will be provided by the Hellenic Financial Stability Fund in exchange for contingent convertible bonds or new shares, but 12% of the amount will be raised from outside investors.
The National Bank plan calls for a 1.71 billion euros rights offering and the rest from stock sold to the Hellenic Financial Stability Fund. The rights offering will include warrants allowing investors to buy back 7.33 shares from the fund for every share they subscribe for in the offering.
Several of the larger hedge funds are expected to participate in the National Bank of Greece offering. Although no funds have commented publicly, Europe's largest credit fund CQS is also said to be interested in the recapitalization deals, as is Third Point.
Alpha Bank A.E. (ALBKY) has also announced a similar recapitalization plan. Under Alpha's plan the bank will sell a rights offering including warrants to private investors to raise 10% of the total amount required. The rest will come from the Hellenic Fund.
The warrants entitle buyers to purchase 7.3 - 9 shares from the Hellenic Fund at fixed prices on a semiannual basis. The bank recently announced it had received sufficient commitments from outside investors to meet the 10% threshold.
Funds like Farallon Partners and York Capital Management are said to be investors in the Alpha Bank recapitalization.
For more of the best investments to play rebounding sectors, check out Good Stocks to Buy Now as this Sector Begins its Lucrative Recovery.