Greek Banks Ask Investors to Take Uncertain Leap of Faith

  • Lenders initiate book-buildings to cover stress test shortfall
  • Government still at loggerheads with creditors over bailout

Greek bank investors are being asked to inject new funds into the lenders for the second time in less than 20 months, even as doubt remains that the country will receive the next round of bailout funds.

The National Bank of Greece SA and Eurobank Ergasias SA joined Piraeus Bank SA and Alpha Bank AE on Thursday in starting book-building processes as they seek to fill part of 14.4 billion-euro ($15.5 billion) hole in their accounts identified by the European Central Bank. The state-owned Hellenic Financial Stability Fund will contribute the rest from loans from Greece’s latest bailout, but not before imposing mandatory losses or "burden sharing” on shareholders and creditors of the banks.

“The recapitalization of Greek banks, perhaps the most critical problem for the Greek state today, has entered its most critical stage,” Emilios Avgouleas, professor of international banking law and finance at the University of Edinburgh, and Levy Institute President Dimitri B. Papadimitriou, said in a report on Thursday. “Instead of repeating the mistakes of the past, recapitalization should create an environment of hope amidst renewed efforts to repair the Greek economy.”

The fundraising comes as uncertainty hangs over the Greece’s own access to funds. A disbursement of as much as 10 billion euros from the European Stability Mechanism to the HFSF, which will backstop private capital injections with state funds, will only take place if the government reaches an agreement with creditors over a set of milestones detailed in the country’s bailout agreement.

Banks have announced plans to shore up their capital before the end of the year, when legislation puts savers with more than 100,000 euros on the hook for losses. The plans include swap offers to creditors, described by Standard & Poor’s as “distressed exchanges."

The National Bank of Greece said on Thursday it aims to raise 1.6 billion euros from a share sale and expects another 691 million euros of capital from a so-called Liability Management Exercise, which includes the conversion of its debt to equity.

Eurobank said it has received commitments of 353 million euros from a group of anchor investors including Fairfax Financial Holdings and Wilbur Ross. It also has an offer from the European Bank of Reconstruction and Development to commit as much as 80 million euros in its share-capital increase. Alpha Bank also announced a 1.66 billion-euro capital increase on Wednesday together with a 1.1 billion-euro debt-to-equity conversion.

Piraeus Bank was the first Greek lender to start raising funds, seeking at least 1.6 billion euros in equity in addition to the 600 million euros raised from its own LME. It said on Friday that the amount sought from investors has been reduced to 1.34 billion euros, after regulators approved capital-raising actions totaling 873 million.

Attica Bank, a small lender, said on Wednesday it will raise as much as 750 million euros in capital, following a separate stress test carried out under the auspices of the Bank of Greece.

Bank investors are also being asked to exchange their shares for a smaller number of new ones in what is known as a reverse split. Under such an arrangement, a split of 100 means that the new shares must be priced 100 times higher than what the shareholder paid for the original ones, in order to break even.

Bank shares lost almost 84 percent of their value since the beginning of the year, while the four biggest firms had combined net losses of about 4.6 billion euros in the first nine months. The lenders were hit by increases in bad loans, subdued economic activity, expensive emergency funding requirements from the European Central Bank, and strict limits on capital transfers.

Share prices have plunged this year
Share prices have plunged this year

An agreement paving the way for the disbursement of the bank recapitalization funds is feasible by Saturday, a Greek government official said. The so-called Euro Working Group of finance ministry executives will hold a call on Sunday to discuss Greece’s progress in meeting its bailout commitments. Government officials from the currency bloc said that bank funds must be disbursed by next week to meet tight deadlines through the end of the year.

“We understand that no bank will conclude its capital raising exercise before a successful conclusion of program negotiations underway between the government and official-sector lenders,” analysts at Athens-based Pantelakis Securities said in a note Friday. “Persistent noise” over whether a deal to unlock the funds will be reached “is not helpful, precisely at a time when banks struggle to attract private-sector interest in their recap process.”

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