RETURNING TO MARKETS
The Investor Greece 2020 I Finance I Analysis
THE GREEK PARLIAMENT HAS APPROVED THE RESTRUCTURING PLAN SCHEME EXPECTED TO REMOVE UP TO €30 BILLION OF NON-PERFORMING LOANS FROM BANKS’ BALANCE SHEETS
HERCULES ASSET PROTECTION SCHEME
At the end of December 2019, Greece’s parliament has approved a Government scheme to help its struggling banks remove up to €30 billion of non-performing loans from their balance sheets. The Government is aiming to dynamically address the long-term problems of the Greek banking system. The securitisation scheme, known as Hercules after the mythical Greek hero, calls for banks to set up special purpose vehicles that would issue bonds for sale to specialist investors.
The European Commission (DG Competition) has approved the scheme and the Government will proceed rapidly with its implementation via the necessary legislative initiatives, paving the way for banks to adjust their respective plans. The implementation of this model will contribute to the faster reduction of bad loans from bank assets, allowing Banks to pick up the pace of lending to the real economy. The senior tranche of the bonds, which would be held by the banks, will carry Government guarantees of up to €12 billion. The banks will be given 18 months to sell the riskier mezzanine and junior bonds. The plan is similar to a successful asset protection scheme used in Italy’s, the GACS model, to help lenders offload bad debt by wrapping it into asset backed securities. If the Hercules plan is completed, Greece’s four systemically important banks would reduce their total non-performing loans to €41 billion, a drop of more than 40%. Hercules will involve setting up special purpose vehicles (SPVs) that will purchase the non-performing loans. That sale would be financed by notes issued by the SPV with a Government guarantee for senior tranches, but state involvement will be limited. Investor appetite for Greek debt has grown strongly this year as the economy recovers following an eight-year recession that saw national output plunge by 25%.
Similar to GACS, according to the European Commission, the guarantee fee will be based on a market benchmark and correspond to the duration and level of risk taken by the Greek State in providing the guarantee. According to the Commission’s press release, the guarantee fee will increase over time in line with the duration of the State’s exposure. Also, in line with GACS in Italy, the appointment of an external servicer will be required. Currently, there are 18 market participants authorised within the credit servicing market in Greece. These should incentivise a more efficient workout process. In Italy, the GACS scheme has been hailed a success at moving approximately €63 billion in gross book value of NPLs off the Italian banks’ balance sheets in 21 rated securitisation transactions from 2016 to 2019.
The Greek banks had a stock of approximately €75 billion of NPLs by gross value held on the balance sheet as of June 2019, and they are targeting a decrease of €25 billion in the stock of NPLs by YE2019, around €7 billion of which was achieved in H1 2019.Of the €75 billion, the majority of NPLs are in the business sector, including both small and large businesses, with €42.7 billion (or 57%). Residential loans represent €24.8 billion (33%) and consumer loans €7.9 billion (10%). These are all down from their peak levels in 2016, and HAPS should help speed up the plans for migrating these loans off bank balance sheets.
Developments in the Greek financial system are positive, with improving capital adequacy ratios, profitability before provisions and liquidity. The continuous increase in bank deposits and the improvement in liquidity allowed the elimination of capital controls as from 1st September 2019, while conditions continue to improve ever since. The four systemic banks have agreed with the ECB/SSM ambitious targets for the reduction of NPLs, while the less systemic ones have agreed similar targets with the Bank of Greece. According to these targets, the NPL ratio is expected to fall below 20% until the end of 2021.
However, even if these targets are achieved, the NPL ratio in Greece will be five times higher than the corresponding European average. Greece's "big four" banks are in the process of agreeing to new, more stringent targets for the reduction of toxic debts in their talks with the European Central Bank's Single Supervisory Mechanism.As Greek lenders intensify efforts to clean up their balance sheets, several large portfolios of nonperforming loans of €1 billion or more are either in the market or being prepared for sale. The country's largest banks, which together account for 98% of the Greek financial system, are all at varying stages of negotiations with the SSM, or Single Supervisory Mechanism, over a fresh round of NPE reduction targets covering the period from 2019 to 2021.
GREEK PRIMARY RESIDENCY PROTECTION SCHEME
In addition to HAPS, law 4605/2019 (Greek Primary Residence Protection Scheme) was also recently approved by the European Commission. This scheme is designed to help support households that have had trouble repaying their mortgages on their primary residence and should help resolve some of the problem loans that affect residential mortgage holders by protecting vulnerable borrowers and reducing strategic defaulters.
In addition to HAPS, law 4605/2019 (Greek Primary Residence Protection Scheme) was also recently approved by the European Commission. This scheme is designed to help support households that have had trouble repaying their mortgages on their primary residence and should help resolve some of the problem loans that affect residential mortgage holders by protecting vulnerable borrowers and reducing strategic defaulters. The applicable interest rate shall be equal to 3M Euribor + 2% with a duration of the settlement of 25 years, which cannot exceed the applicant’s 80th year of age. Those who are eligible for the protection will also receive a grant corresponding to 20%-50% of their monthly loan payment depending on their income.
SUCCESSFUL RETURN TO THE MARKET
In January 2020, Greece has attracted record orders for its first 15-year bond sale since the financial crisis, Investor demand for the €2.5 billion bond exceeded €18.8 billion, the biggest order book since Greece returned to the international bond market in 2017 after a debt crisis that locked it out for years. After issuing bonds of up to 10 years’ maturity since then, Greece is looking to extend the term of its debt. The positive outlook raised hopes for Greece’s eventual return to an investment-grade rating, which would make its bonds eligible for the European Central Bank’s bond-buying programme.
Those expectations pushed its 10-year bond yields to a three-month low, near record low levels. The Greek debt agency has two main financing scenarios for 2020 in mind, depending on the amount of early debt repayments. One of these focuses on reducing its €12.6 billion stock of T-bills by issuing Government bonds. The market rehabilitation of Greece since its restructuring reached a notable landmark in October when it sold some short-term debt at a negative yield. Following the Fitch upgrade, longer-dated yields have touched record lows, with 10-year borrowing costs sinking to 1.14% as investors snap up higher-yielding eurozone debt.