Despite having the highest overall non-performing loan ratio in Europe at 46.5 percent, according to the European Banking Authority’s latest transparency exercise, Greece’s banks have only recently begun to sell off non-core loans.
However, momentum is building. Greek banks have agreed with European Central Bank regulators to reduce their non-performing exposures to €64.6 billion by the end of 2019, from more than €100 billion.
Greece, which has had three financial bail-outs from the eurozone and the International Monetary Fund since 2010, has been slow to address its debt problem for several reasons. Economic uncertainty, political instability and an inadequate NPL workout framework have not been conducive to loan sales.
However, the economy is gradually improving from a very low base, reforms have been made to the country’s judicial structure and banks are in a better position to sell NPLs having built provisions and offloaded a large proportion of their Central and Eastern European exposure. “Until now, there have been a lot of delays because there was a serious lack of manpower dedicated to NPLs. Banks had to equip themselves with the knowledge to sell portfolios by hiring lawyers and real estate agents,” says Evangelos Delis, senior manager of deal advisory at KPMG in Greece.
The country also lacked a secondary debt trading market, but was required to facilitate one as a condition of its bail-out.
“Legislation was passed in 2015, at which point the first independent loan servicers began applying for licences with the Bank of Greece,” comments an advisor to NPL buyers in Southeast Europe, who did not want to be named.
“It was a long, protracted process for some of the early movers, however the legislation has since been amended to make the process smoother.” Ten licences have now been issued.
The next step banks are taking is to reorganise their NPL departments to divide portfolios into customers that remain viable and those that are not. “A lot of foundations have been laid. On the back of that we’ve started to see some NPL portfolios coming to the market,” the advisor says. Four ‘systemic’ banks control 90 percent of the country’s debt, according to the ECB. Like in Italy, banks have begun by dealing with fully provisioned, unsecured portfolios. Eurobank’s sale of a €1.5 billion portfolio of non-performing consumer loans to Swedish credit management firm Intrum in October 2017 marked the first such disposal. Now secured transactions backed by real estate are beginning to emerge.
Piraeus Bank’s Project Amoeba represents the country’s first large property-backed NPL sale and follows the bank’s sale of commercial real estate loans linked to retail investor Charagionis Group, with a €90 million face value, to Fortress last year. Binding bids for the Amoeba portfolio, which contains circa €1.6 billion of corporate loans backed by assets including hotels, were due as Real Estate Capital went to press.
Project Amoeba is likely to trigger further secured portfolio sales, as buyers and sellers respond to positive momentum. “The market will wait to see what happens in the next three or four months; after that, NPL sales may go faster,” says KPMG’s Delis.
Alpha Bank is reported to be planning a €700 million secured portfolio sale this year and Greece’s ‘pillar’ banks are expected to bring portfolios to the market during Q3-Q4 2018. “They have agreed to certain targets to reduce NPL ratios by 2019 but are running out of time,” says the advisor.
How banks approach deleveraging depends on the assets. “The bulk of trades are likely to be outright sales, particularly if you’re talking about manageable deals that you would expect equity investors to take. You have to consider the regulatory aspect of it; if it’s a true sale it allows derecognition of assets off their balance sheet,” the advisor continues.
Demand for Greek NPLs seems to be coming from firms interested in portfolio transactions backed by real estate and those focused on individual borrower connections.
For instance, on a portfolio basis, NPL buyers that have invested in markets including Ireland, Spain and Italy are now targeting Greece, with the aim of capturing returns that are no longer on offer in more established markets. Experienced NPL buyers Apollo Global Management, Bain Capital, Davidson Kempner Capital Management and Kildare Partners are reportedly in the race for Amoeba, for example.
Other investors are targeting single borrower connections. “The leisure and hotel industry is very hot; a lot of people show interest in buying debt from banks with a view to carrying out a loan-to-own strategy or setting up a platform with a local partner to buy distressed hotel assets because there is a lot of fragmentation in the market which provides turnaround and value-creation opportunities,” says the NPL advisor.
However, banks remain reluctant to sell debt secured by trophy assets. “The conversion ratio of deals at present is not commensurate to the time and effort people have spent doing groundwork but this may well change,” says Olga Galazoula of law firm Ashurst, a specialist in distressed investments, often with a cross-border element. One of the main challenges investors face when trying to buy NPLs in Greece relates to enforcement. If an investor wants to take control of underlying property, it needs to go through a court-driven process which can last up to four years, despite changes in legislation to make it more efficient. Such processes remain largely untested.
Investors must also make provision for servicing, since the law requires NPLs to be serviced by Greek companies. “How are investors going to find the right partner with staff that understand the assets and know the market to deliver value?” asks the advisor. Some have taken steps to incorporate local providers by forming servicing agreements.
Pursuing their exit strategies can be complex. “It is important for investors to select the right real estate advisors to guide them because there is significant price volatility in the market owing to continual changes in the tax system and new development that is taking place in the country,” Delis says.
Another issue for NPL investors is how to get their money out of Greece. Capital controls remain in place since the country’s near-bankruptcy in 2015, which means money leaving the domestic financial system to go abroad is currently restricted.
A potential threat to the Greek NPL market is the looming result of an ECB stress test, set to be published in May. Whether banks have provisioned enough for the volume of NPLs they’re holding is of some concern as fresh bank capital requirements would almost certainly disrupt NPL disposal programmes.
Regulatory pressure on banks to work through their huge non-performing debt piles is growing ever more acute, however, and Greece has now reached a point at which it is equipped to plough on with it.
Speaking to Deloitte for its 2017-18 Global Deleveraging Report, Eurobank’s manager of group strategy, Konstantin Vrettos, argued that the reforms of processes in the Greek market has already been achieved, setting the scene for an active loan sales market.
“The tools are all in place,” Vrettos said. “Now the market just needs to test them.”