Greek Bank Attica Leads Way to Cut Bad Loans and Bolster Capital

  • Securitization helps lender kill two birds with one stone
  • Deal will put bank back on the map, CEO Pandalakis says

Greece’s larger banks can take a leaf out of Attica Bank’s playbook.

While the country’s four big banks are struggling to shrink their non-performing exposures, smaller lender Attica Bank has become Greece’s first to turn to securitization as a way to both shrink its bad loans and close a capital shortfall. The Athens-based bank is using the services of Aldridge EDC Speciality Finance -- an investment firm specializing in distressed assets created by Erik Fallstrom, co-founder of bad-loans advisory firm Hoist Finance AB, and Andreas Tuczka, a former managing director at Lone Star.

Attica is securitizing 1.3 billion euros ($1.5 billion) of bad loans under a plan that will halve its NPEs. Although not uncommon in Europe, the transaction -- approved by the Bank of Greece -- is a first for the country and may be a harbinger of similar deals by larger systemic lenders.

"With the completion of this deal, Attica Bank will be back on the map,” Chief Executive Officer Theodoros Pandalakis said in an interview.

At the end of last year, the stock of NPEs at Greece’s four biggest banks –- National Bank of Greece SA, Piraeus Bank SA, Alpha Bank AE and Eurobank Ergasias SA -- had fallen by just 1.2 percent from end-September 2016, reaching 106.3 billion euros or 44.8 percent of total exposures. In the first quarter of 2017, banks missed targets for shrinking non-performing loans amid uncertainty related to the seemingly endless negotiations between the Greek government and country’s creditors. NPLs actually rose to 75.2 billion euros, higher than a targeted 74.7 billion euros.

No Blood

Attica Bank, with 2.4 billion euros of NPEs at the end of 2016, or 61.8 percent of total loans, has one of the highest proportion of bad debt in Greece. It also faced a capital shortfall of 70 million euros in an adverse stress test scenario of the comprehensive assessment by the Bank of Greece.

After the securitization, Attica Bank expects its NPE ratio to fall to 39.5 percent from 61.8 percent and the proportion of its non-performing loans to slide to 33 percent from 50 percent. At the same time, its Tier 1 capital is set to increase to 17 percent from 14.8 percent now.

“Attica’s deal can solve the problem in the short term without any blood,” said Dimitris Skaleos, a partner at Sigma Catalyst, an Athens-based financial advisory firm. “They are postponing the problem, but at least they fill the Tier1 capital gap.”

Markets have welcomed the development, sending the bank’s stock higher in Athens. Attica Bank shares have almost doubled since early May -- when it announced its securitization plan -- to 0.105 euros.

International investors have been circling Greek banks for years, waiting to snap up bad loans at deeply discounted prices. Domestic lenders, however, have been slow in selling because they couldn’t take losses that could have impacted their regulatory capital levels.

Attica’s plan -- approved by its shareholders on May 15 -- entails the transfer of 1.3 billion euros of bad loans to a Special Purpose Vehicle company based in Luxembourg. This SPV will issue a senior bond of a nominal value of 525.2 million euros and a junior note of a nominal value of 806.4 million euros. The bank is also setting up a liabilities management company, called "Goddess Artemis."

Win-Win Situation

Aldridge EDC Speciality Finance is buying 80 percent of Goddess Artemis. Under the plan, Goddess Artemis will also sign a seven-year accord to manage the SPV’s bad-loans portfolio. Aldridge EDC will buy Attica Bank’s junior note, composed of loans fully covered by credit-risk provisions, for 70 million euros. Attica will record that amount as a profit on its balance sheet, counting it as Tier 1 Capital.

Aldridge is effectively getting the junior bond with a face value of more than 800 million euros for 70 million euros. Additionally, its control of Goddess Artemis, which will manage the SPV’s assets for seven years, allows it to earns fees and also recover what it can from the bad loans. Aldridge officials didn’t have an immediate comment on the deal.

For Attica, the plan buys some much-needed breathing space. In September, Greek banks submitted their operational targets for NPEs and NPLs. According to those targets approved by the Frankfurt-based Single Supervisor Mechanism, NPE ratios must decrease to 33.9 percent of total loans and NPLs have to fall to 20.4 percent by the end of 2019.

“In the long run the bank may still need to take a write down on the senior note in case the net cashflows from the transferred NPL portfolio after service fees and expenses are deducted, are not sufficient to service the senior note,” said Skaleos.

— With assistance by Luca Casiraghi

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