1. What’s Going On In Greece
1.1 Global Financial Crisis, Sovereign Debt Crisis and the Troika
Greece is a country that witnessed big changes in the last years. 2008 was the year when the Global Financial Crisis exploded, changing the world for all of us. 2009 saw the burst of the sovereign debt crisis, and the fall of Greek economy which, due to its structural weaknesses, nearly went into default. In that period, a situation of alarm in the financial markets was underway, and bond yields rose so high that private capital markets were practically no longer available for many Sovereign Institutions as a funding source.
On May 2010 the Troika composed by the European Commission, the IMF and the European Central Bank (ECB) agreed upon a first €110bn bailout loan to save the Greek economy: they granted financial help to Greece, but they asked for structural reforms, austerity (read spend less money and spend better) and, not ultimately, higher taxes.
If you ask Greek people they will say there was a period during those years in which every day a big company declared bankruptcy. They say that if you had a mortgage loan on your house, or family, or plans, everything was under threat: every day brought new surprises, and planning about any future became impossible. Suddenly middle class people, who were still pursuing higher education or starting their career, discovered the only hope they could afford was to survive this storm.
1.2 Worsening of the situation
Despite the population’s sacrifices, the worsening of the macroeconomic situation obliged the leaders of the Eurozone to grant Greece a second bailout loan worth €130bn in October 2010, with the further condition of forcing all private creditors holding Greek government bonds to sign a deal accepting lower interest rates and a 53.5% face value loss on those assets. Eurozone experts said the aim was for the country to resume using the private capital markets for debt refinance and as a source to partly cover its future financial needs, already in 2015. By the end of 2010 the Greek GDP had already fallen 14.4% since 2008, to a value equal to €225bn; and unemployment rate had doubled, reaching 14%.
During this transition period, major changes happened also to the banking sector: the Troika obliged the Central Bank of Greece to restructure the Greek banking sector by separating the bad banks (which kept billions of euros of bad assets on their balance sheets) from the four pillar banks (namely Euro Bank, Piraeus Bank, Alpha Bank and NBG), which survived, and were distributed the majority of the good assets.
1.3 Greece four years later
In the recent days, Greece has unlocked a further €10bn of bailout aid, expected to boost confidence in the country, while experts from the fund management Group BlackRock are conducting stress tests on the Hellenic banks’ loan books, as a part of the ongoing review of the Greece’s financial health under the terms of the country’s bailout by the so-called Troika.
Looking at Main Street, the Greek GDP kept falling 5.3% every year on average, equal to an astonishing -29% over five years (it was equal to €182bn in 2013); the unemployment rate has reached 27.5% but it is expected to stabilize during 2014; and the trade deficit was put under control at a level of around €1.4bn (0.58% in terms of deficit to GDP ratio).
Piraeus Bank has recently returned on the market with the issuance of a new senior unsecured bond with a €500m face value and a 5% coupon and the preparation of a separate €1.8bn share offering, which underwent a 6x oversubscription, an issuance welcomed as a first sign of the return to the markets of the Hellas.
2. Institutional Investors Seeking High Yield Returns, and Not Only Through Stocks
2.1 International investors are back in the Mediterranean…
2014 has already proven to be a hot year for financial investors, and examples of the restored appetite for the companies based in the Mediterranean region are multiple:
– In March, BlackRock rose as the second shareholder of Banca Intesa Sanpaolo (with a share of 5.004%, worth €1.96bn at today’s market cap;
– Vodafone agreed to buy Spanish cable operator ONO for €7.2bn;
– The already mentioned Greek Piraeus Bank saw an oversubscription over its bond of 6x the amount of the bond.
Much of this activism has come from institutional investors, who are benefiting from the low valuations of Southern European companies.
2.2 They are widening the scope of their action (shadow banking)…
Another major trend for investors, and for the bigger PE firms in particular, is that they are no longer interested only in stocks and turnaround activity, as reported recently by the Financial Times: “PE firms’ investments have branched out, and they are now active more and more in areas such as property and credit, activities which were once a typical focus of banks”. A clear example of the former is Blackstone’s acquisition of Corriere della Sera’s headquarter from RCS Mediagroup for €120m in November 2013.
Credit acquisition, instead, relates to the acquisition of portfolios of loans from banks, and it is often referred to with the term shadow banking. The size of shadow banking is remarkable and it is rapidly growing, because “non-banks” do not face the same regulatory burdens as banks, and hence they manage to turn profit a business that banks now find uneconomic due to Basel regulations.
Estimates reveal that only a quarter of Apollo Management’s €117bn odd business is now focused on private equity, while it has recently gobbled up so many corporate loans and bonds that its credit portfolio has exploded to more than €73bn, compared to just €3bn seven years ago. At Blackstone and KKR the switch is less dramatic: according to Bloomberg’s calculations, credit is just a quarter of their portfolios. But they are shifting focus too: recently, Blackstone announced plans to start extending mortgage credit as part of its property business.
The investments that are object of the funds appetite are usually high risk, and high yield portfolios made of the so called Non Performing Loans (NPLs), or Non-Core Banking Assets. Roughly speaking, a loan is non-performing when payments of interest and principal are past due by 90 days or more, and there are good reasons to doubt that payments will be made in full.
The increase in the volume of NPLs after the Crisis did not only change the scenario for borrowers, but it also obliged banks to develop more advanced tools to evaluate and manage their assets, to recover money from problematic debtors and to calculate capital requirements.
From a certain point of view, buying non-performing loans is equivalent to “betting” on the capacity of these people to repay their debts, thus squeezing a value that is higher than the fair value of those loans. The investment is highly speculative, because NPLs’ book value is so low that even recovering only a portion of the loan will provide high returns to the asset owner.
2.3 …and Greece has something to offer in this field
The magnitude of NPLs rose exponentially in the post-crisis years, and it is expected to keep growing at least until 2015. Greek banks for example have more than €80bn of NPLs, equal to 31% of the total loan book, according to the latest estimates (even if some experts believe that the figure could reach 60% if we include NPLs that are not yet declared as such). Some bankers expect the tally to peak at 35-40% within the next 18 months, and none of them was sold to the market so far.
The volume of NPLs increased so much because, even if banks became more risk averse during these years cutting credit, the long term loans which were issued at more generous conditions before the Crisis are still in place, and the number of companies and individuals who are facing problems to repay their debts – and who have either gone into bankruptcy or had to arrange rescheduling or restructuring plans on their loans – is still rising.
People in London say that NPLs attracted strong interest from investors, particularly US hedge funds, in Greece of late, as concerns about the Southern periphery of the Eurozone have continued to recede. “Policy makers love the idea,” said another person familiar with the plan. “The timing is good, too – 2014 should be the year when Greece starts to think about the worst being over”.
3. Will An International Market For Non-Core Assets Take Off?
This situation can be read in two ways. On the one hand the Hellenic economy, even if still weak and under “intensive care”, has gained reliability towards international investors, who are now more willing to invest in the country. On the other hand, this is one symptom of a widespread hunger for higher yields that has taken investors in the recent period, and which has recently cast new interest on markets like Italy, Spain and Greece in a macroeconomic scenario of very low yields on investments in the Western countries and of slowing pace emerging economies.
From the point of view of real economy, the idea of investing on NPLs has relevant implications for borrowers, who could obtain loans in spite of the credit crunch; banks, which could get rid of loans that are demanding in terms of capital requirements; and, of course, regulators.
So, speculators are ready to place their bets, and for one time regulators believe these investments could help improve the economy. Greek banks on their side could offload portions of their assets, and restart lending. The operational vehicles to put in place such investments will be ready soon (if anything is not already working as we speak about the issue, given the high stake of the participants to the table). Time will say what happens in the near future…
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