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Certificates investors feel the government crisis

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Griechenland-Anleihen verlieren immer mehr an Wert. Quelle: dpa

Greece bonds are losing value. Source: AP

Now is the case, the European leaders wanted to avoid at all costs occurred: The rating agency Standard & Poor’s (S & P), the score for the creditworthiness of Greece to "BB +" reduced – junk status. The worse the conditions for Greece. For 19 May have to refinance the Hellenes € 8.5 billion due to debt and are in need of financial assistance from other European countries, this can result in bankruptcy.

For holders of credit loans is not a new situation. About a year ago it was the bankruptcy of General Motors, which startled investors, now face new hardships of Greece. As in the debt crisis continues to drop its credit rating. Episode: Greece bonds lose more and more in value, the insurance premiums (credit default swaps) for the country are becoming more expensive.

As in some Greek bonds Credit Linked Notes (CLN stick) must also accept these certificates strong price decline. Landesbank Baden-Wurttemberg (LBBW) has launched several CLNs based on a basket of European government bonds. Investors receive this as a rule, somewhat higher interest rates than in the direct investment in the respective government bonds, but carry a higher risk of default. Should any of the reference entities fail in the basket, is the maturity of the credit loan is not repaid the face value of 100 percent, but investors receive bonds of the defaulted reference entities – and increases the likelihood that they get delivered Greece bonds or be miserable residual value . This concerns would be under the name "Synthia" current identification numbers LBW1D0, LBW6DN, LBW88T and LBW88U. "Occurs in these credit bonds until maturity, a credit event, investors the equivalent of the cheapest Greece-bond, which is located at the time on the market. What it is, you can not pre judge," said Dieter Berner, Certification Specialist at LBBW.

But when would occur in Greece at all a credit event? In the conditions of the certificates is with "non-payment, bankruptcy or debt restructuring translated. Dieter Berner be: "For example, Greece no longer meets its payment obligations or the equipment of the existing bonds, for example, the interest rate, the nominal value of the currency or maturity changes, the eradication of the CLNs is in Greek bonds." Conversely: Note means a result of support by the European Union (EU) or the International Monetary Fund (IMF) all government bonds remain in €, made the interest payments on time in the euro and the position of the debtor towards Greece deteriorated not lie with the LBBW Synthia no credit event before, so Berners.

In two credit bonds of DZ Bank (TSX: DZ6Z7E and DZ8JL5), the record under the name "Emma", Greece is represented as a reference entity. The increased risk of Greece bonds was reflected in the credit linked notes. The Emma-bond with the maturity to 2015 (WKN: DZ6Z7E) is listed on 04.28.2010 at about 77 percent, the LBBW Synthia euro government bonds (WKN: LBW6DN) at about 72 percent. The issue price in the summer of last year amounted to two papers still at 100 percent.

Niels Nauhaus from the Consumer Baden-Wuerttemberg is the credit-linked notes generally skeptical of "diversifying Instead, as is suggested in the conditions there in the credit quality bonds formation of lumps of risks. If you want to use the higher chance of some government bonds, you should invest directly in these and sufficiently diversified. " Whether the interest is really the CLNs market conditions, investors could not estimate correctly, Nauhaus. This is an example of that bond Synthia clear: For a term until 09/20/2014 it throws off a return of 11.1 percent, a Greece-bond pays roughly the same period with almost 14 percent. By comparison, German government bonds with similar maturity offer a yield of 1.7 percent (as of 28/04/2010). Explosive composition

Besides the risk of Greece bears the holder of the bond credit rating while the credit risks of Italy, France and Denmark. In other credit-linked notes even Spain, Ireland and Portugal are represented in the basket – countries that are currently classified by market participants as problematic. The greater question their creditworthiness is made, the higher the losses from the CLNs. The Unicredit concedes it has no CLNs based on reference entities of the countries problems are found.

Even if we succeed in saving relief efforts with Greece, the affected investors not breathe. For now, Portugal is traded as the next candidate loose.