At the end of January, Greece inked its longest trade since 2009, a €2.5 billion 15-year syndicated deal led by Bank of America, Barclays, BNP Paribas, Goldman Sachs, HSBC and JPMorgan.
The deal is the sovereign’s largest since 2014, and attracted an order book of €18.8 billion while offering a yield of less than 2%.
This remarkable reception, thanks in no small part to Europe’s anaemic interest rate environment, is also further evidence of Greece’s capital market rehabilitation – last October the sovereign even issued short-term debt at a negative yield.
But a key hurdle still lies ahead: dealing with the stock of non-performing loans at the Greek banks before new EU regulations on minimum coverage for NPL exposures come into force in 2021.
The launch by the Greek government of an asset-protection scheme to deal with the country’s NPL problem – based on the successful Italian GACS (Garanzia sulla Cartolarizzazione delle Sofferenze) model – late last year marks an important step forward in this process.
The labours of Hercules
The scheme, called The Hercules Asset Protection Scheme (HAPS), will enable banks to transfer their NPL exposures to a special purpose vehicle, which will subsequently securitize them.
The Hellenic state will guarantee the senior tranches of the securitization deals as long as more than half of the non-guaranteed mezzanine and junior tranches have been sold to private investors.
Originally envisaged to provide €9 billion in guarantees, HAPS has now been upped to €12 billion.
Now that this is in place, up to €35 billion of Greek non-performing exposure risk is expected to come to the market by mid 2021. That is a huge amount of paper to shift in just one year.
First in the queue is Alpha Bank, which is lining up a deal to transfer €12 billion gross book value of loans under its Project Galaxy scheme.
Eurobank will sell €7.4 billion of loans via its Project Cairo securitization to doValue, a Fortress subsidiary.
Piraeus Bank is prepping a €2 billion sale, dubbed Project Phoenix, while the National Bank of Greece is expected to securitize €6 billion of NPLs via HAPS in 2020.
This looks like a heady opportunity for distressed debt specialists in the region, but they should proceed with care. The HAPS guarantee requires the appointment of an external servicer, so the banks have scrambled to secure tie-ups with specialists in the field.
There are 18 licensed credit servicers in Greece, so Alpha Bank has spun out its NPL servicing to Cepal Hellas, and Eurobank has sold its servicer, Financial Planning Services, to doValue as part of the Project Cairo deal.
Piraeus Bank’s tie-up with Swedish loan servicer Intrum has created the largest independent loan servicer in the country, Intrum Hellas.
Servicing Greek non-performing debt is uniquely difficult thanks to the country’s Katseli law, which was introduced on a temporary basis in 2010 and named after former economy minister Louka Katseli. This offers protection from bank foreclosure to borrowers on their primary residence.
It was designed to help vulnerable borrowers but has resulted in a swathe of strategic defaulters, who have the ability to repay but seek legal protection to avoid doing so.
Their cases can take years to be heard in court, during which time there is little that lenders can do.
In April last year, however, the Greek parliament tightened the criteria for the eligibility of borrowers to obtain protection under the law, setting a ceiling on the commercial value of primary residences at €250,000 and on outstanding loan balances at €130,000. While this is a step in the right direction, it remains to be seen how effective the changes will be.
The recovery period for Greek residential mortgage-backed securities is around five to seven years, compared with less than four years in northern Italy.
Around 31% of mortgage borrowers in Greece are understood to have defaulted and sought legal protection under the Katseli Law.
That is a huge problem for both these new servicing partnerships and for the distressed-debt buyers lining up to buy Greek NPL asset-backed securities. Servicing is underpinned by the ability to collect.
According to DBRS, Italy’s GACS scheme has helped the country to cut its NPL volumes by 46%. Distressed investors that are looking to HAPS to repeat this feat in Greece could well be disappointed.
Unlike in Italy, the Greek guarantee that wraps the senior tranches is not investment grade (Greece is rated double-B). Also, GACS has securitized huge volumes of unlikely-to-pay loans, and Greece does not yet have a regulatory framework to distinguish these from other non-performing exposures.
These challenges will no doubt be relished by distressed buyers, several of whom have already bought Greek assets. And new players continue to move in – Arrow Global launched a €2 billion pan-European fund to buy NPEs from EU financial institutions in December last year.
One of the first puzzles that they have to solve, however, is the expected recovery trajectory for the HAPS securitizations. Thanks to the Katseli law, that could turn out to be a tricky one to solve.