Greece – the next frontier for non-performing loans?
February 02, 2016
The Greek market features in most conversations I have with investors these days. So I thought I’d make a few comments on what is happening in this market and what my expectations are.
My team estimates that Greek non-performing loans (NPLs) currently account for up to 10% of the total stock of NPLs in Europe.
Finding a viable solution to the Greek banks’ deteriorating NPL problem is key to stabilising the Greek banking sector and has been high on the agenda of negotiations between the Greek government and Greece’s official creditors. It is also a pre-requisite to creating a banking system that can support the economy and new funding origination. Investors are showing a keen interest in the region. But macro developments, political instability and the absence of a comprehensive NPL resolution framework have not helped to support the development of an NPL market.
Key developments in the legal and regulatory framework
The long anticipated “NPL law” (Law4354/2015) came into force on 16 December 2015. It sets out the legal and regulatory framework for NPLs to be transferred to other financial institutions (including foreign funds) and / or be managed by non-banking NPL servicers. Whilst it currently applies to corporate loans and non-primary residency mortgages only, there is a commitment to enact special legislation for unsecured consumer lending, primary residency mortgages, SME loans and also loans guaranteed by the Greek state by 15th February 2016.
The NPL law also underpins the establishment and operation of non-banking NPL servicers. A company in the form of Société Anonyme with its seat in Greece or another member state of the European economic area (EEA) is eligible to obtain a license from the Bank of Greece. Non-banking NPL servicers are given full power to collect and enforce a delinquent claim. They are allowed to restructure, collect payment, exercise judicial remedies, enforce and, in general, take any action a banking institution would to pursue its claim.
The revision of the Greek Bankruptcy Code enacted earlier in 2015 further supports NPL resolution by, amongst other points, placing greater emphasis on rescue and rehabilitation but also expediting key procedures.
The recent improvements in the broader NPL resolution framework have been welcomed by Greek banks as an additional tool for their disposal. Our discussions though indicate that the banks’ priority over the next year or so is to keep NPLs on their books and seek to maximise recovery by taking a more aggressive stance on large corporate restructurings. They plan to do this by employing more effective work out procedures in house for the more granular asset classes and also by selectively outsourcing servicing to non-banking NPL servicers. Banks still contemplate portfolio sales but as a second step and only “when the time is right”.
My experience from other new markets
My view is that the unprecedented volume of NPLs will push Greek banks to sell portfolios earlier than envisaged. I do not, however, anticipate a big bang. Similar to other new markets, I expect to see small portfolios coming to market to test appetite and these, in the first instance, are likely to be unsecured consumer and possibly SME loans.
Many investors ask me what I think the challenges with Greek portfolio transactions will be, particularly in the early days. Similar to other developing markets, I expect these to be information quality including lack of real time information on recoveries, gaps in pricing expectations and extended sales timetables as stakeholders familiarise themselves with the process and also seek solutions to potential gaps in the legal / regulatory framework. If, however, foreign investors are prepared to take some risk then this will provide them a good learning ground before progressing to larger opportunities.
Establishing non-banking NPL servicers is also key to the efficient development of an NPL market. My team thinks there is space for 2-3 major players. A number of international investors are already well progressed in their conversations in Athens with key stakeholders.
What do you make of the Greek market? What are the opportunities for investors? Share your thoughts below or schedule a meeting to discuss your plans in confidence.