|Greek presidential guards take part in a ceremonial change|
Greek bankers have been out in force again, bumping into one another at the doors of funds in London and other financial centres. Their purpose, once more, has been to drum up bids for recapitalizations – the third in as many years – after the ECB published its latest Greek stress test and asset quality review on October 31.
The latest review is part of a third, €86 billion bailout agreed with creditors in the summer. It is designed to instil confidence, after the bleeding of deposits following Syriza’s election victory in January, and the prolonged bank holiday and capital controls imposed after a last-minute referendum on the new bailout. Valuations of the four main Greek banks had fallen, in price-to-book-value terms, to between 0.36x (National Bank of Greece) and 0.08x (Piraeus Bank) by late October, according to Berenberg.
The €14.4 billion capital shortfall that the ECB calculated in its adverse scenario was less than expected, though NBG and Piraeus – which have large books of mortgages and SMEs, respectively – had disproportionately big shortfalls of more than €4 billion each. Similarly, second and third quarter bank results in early November were a positive surprise, according to Citi, with increases in problem loans of between one and two percentage points year-on-year.
Nevertheless, senior bondholders were included in bail-in rules under a new recapitalization law passed through the Greek parliament in late October. That was despite lingering hopes they would be protected alongside depositors until the eurozone’s Bank Recovery and Resolution Directive (BRRD) comes into force on January 1, 2016.
The banks sought to reduce the shortfalls by between €600 million (Piraeus) and €1 billion (Alpha Bank) via cash and share exchanges offered to bondholders from October. These implied losses on senior debt of more than 50%, according to Moody’s. Creditors had little choice as the participation of the state Hellenic Financial Stability Fund (HFSF) – more likely if the liability management exercises failed and probable in any case for Piraeus and NBG – would a trigger bail-in.
The recapitalization rules stipulate that the banks must cover at least the ECB’s base case shortfall privately to qualify for HFSF funds (mostly contingent convertible bonds) and avoid state-directed resolution procedures. After the liability management exercise, and with Alpha Bank and Eurobank further seeking to cover the adverse-scenario privately, Greek banks were simultaneously asking private investors for a total of at least €6 billion.
It has not been “a walk in the park” in the words of one of the bookrunners. Yet another disagreement with creditors over the details of reforms required in the first bailout review was “not helpful” says another investment banker involved.
The Eurogroup must be happy with the reforms to release €10 billion earmarked for the banks and the disbursement was delayed just as banks were trying to convince investors that Greece was back on track.
“We’ve seen great demand from investors of various profiles and in various jurisdictions, including long and short-term funds,” says a spokesperson for Piraeus, the biggest domestic lender, while the books were still open in mid-November.
But why would anyone invest in a Greek bank? Those that jumped into the last capital raising at much higher valuations have no rights in the new one and are almost getting wiped out. Still, some hedge funds more than quadrupled their money in less than a year, says one banker, after exercising warrants over HFSF shares offered as incentive to buy into the 2012 recapitalization. They would corral support again, says the banker.
This time there will be no warrants, though funds that put in new money or participate in the liability management exercise get the whole bank for about a third of the price, as the old book is worth so little.
“It’s like an IPO,” says Alex Boulougouris, Athens-based banks analyst at broker Wood & Co.
Some investors have tried to get the equity even cheaper by betting a private-sector recapitalization will go ahead, and buying into the bonds – which Boulougouris says have risen to closer to par as a result. The risk for all of them, of course, is that the banks have to come back a fourth time, and the same thing happens to the third-round investors that happened to the last ones.
The ECB’s adverse scenario envisages an economic contraction in Greece of around 7% in the next three years, so the situation would have to be severe. The economy has already shrunk by a quarter during the crisis. If Greece passes the bailout reviews, the ECB could start buying Greek bonds in its quantitative easing programme, potentially lifting prices of the banks’ assets, and by extension their valuations.
But some investors will have taken the government’s latest disagreement with its creditors as a warning that negotiations could yet break down irretrievably. The debate centred on the level of income and house value above which banks could evict homeowners under a new foreclosure law.
The law is important “politically and for the banks”, says Boulougouris, as the old framework has bred strategic defaulters. Ironically, the old bailout, which was agreed by a more creditor-friendly government, had let the issue pass.