Private sales of primarily unsecured loans have led to a minimal decrease in Greek banks' nonperforming loan (NPL) ratio, which reached 49% in 2016. Over this period, a series of changes paved the way for a more systemic approach to NPL reduction. Amendments in the insolvency law, implementation of an out-of-court process, improvements to the judicial system, and creation of a special servicing sector are some of the developments that have contributed most, lowering the ratio to 40% as of 2019. On Dec. 12, 2019, the Greek Parliament approved the Hercules Asset Protection Scheme (HAPS), aimed at accelerating Greek banks' sale of NPLs and reducing the exposure to 20% within the next two years.

In this report, S&P Global Ratings breaks down the HAPS' key points, and provides examples of how each of the four systemic banks--Alpha Bank A.E., Eurobank S.A., National Bank of Greece S.A., and Piraeus Bank S.A.--plan to use it. These banks have adjusted their strategies to cope with the spread of COVID-19, although the exact timelines and overall effectiveness remain unclear. (For more information on the Greek NPL market and the HAPS, see "The Labors Of Hercules: Still Not Enough To Turn Around Greek Banks," published on Jan. 27, 2020, and "European Nonperforming Loan Markets Under The Spotlight," published on Nov. 12, 2019.)

Key Points Of The HAPS

Depending on the realized collections, servicing fees and interest on the mezzanine notes can be deferred. The law states that if the net proceeds are lower than 20% of the servicer's business plan projections, the servicing fee and interest on the mezzanine notes will be deferred by at least 20%. This condition will remain until the senior notes have been fully repaid, or the net proceeds are back on track according to the business plan. The conditions apply after 12 months from the closing of the transaction and would be further specified in the transaction documents.

The banks or the senior noteholders submit the application to obtain a guarantee to the Ministry of Finance, which checks it for completeness within five days and forwards it to the Guarantee Monitoring Committee. The guarantee will only be effective if more than 50% of the junior notes have been sold at a positive value, meeting the conditions for a significant risk transfer and accounting derecognition, which effectively removes the asset from the bank's balance sheet.

The law also specifies that the servicer may be replaced if the net proceeds are lower than 30% of the amounts envisaged in the servicer's business plan after two consecutive payment dates. The replaced servicer will not have any right to reimbursement, and the newly appointed servicer should be an independent company without any link to the replaced servicer.

After 50 days from the nonpayment of any due amount to the senior notes, the noteholders will notify the Greek government through their representative. Within 30 days of the notification, the Greek government will pay the amounts due to the senior noteholders, according to the transaction's terms and conditions. The calculation of the guarantee fee is based on the Greek government's credit default swaps (CDS), with the fee stepping up every four, six, and 10 years, considering the difference between the CDS maturities of three, five, seven, and 10 years.

Asset Protection Schemes Compared

Greek Banks' Uptake Of HAPS Varies

NPL sales in Greece have accelerated over the past three years, mainly comprising private sales of unsecured assets (see table 1). The target of reducing banks' NPL exposures to below 20% by 2021 remains ambitious, with different banks taking varying approaches. A significant number of securitizations, together with structural changes within the banks, are the major initiatives for 2020. Out of those, both Alpha Bank A.E. and Eurobank S.A. are aiming to utilize the HAPS to a greater extent in 2020, and we expect other key banks to follow in 2021.

Additionally, some banks have already shared how the COVID-19 outbreak has shifted their plans to use HAPS relating transaction sizes or timelines.

Alpha Bank A.E.   Alpha Bank intends to frontload the sale of its NPL exposures with a €12 billion securitization from Project Galaxy, and reduce its NPL exposure to below 20%. The assets in scope are a mix of residential, small and mid-size enterprises (SMEs), small secured business loans (SBL), and unsecured loans. In addition, Alpha Bank will focus on its core business and form a new company comprising the bank's existing NPL management platform and Cepal Hellas S.A. This company will be sold to investors and Alpha Bank will enter into a long-term agreement with the new entity, which will service its portfolios. Alpha Bank announced that, due to the spread of COVID-19, the timeline might be shifted, and it will make a decision regarding project Galaxy in the second half of 2020.

Eurobank S.A.   Eurobank has announced that despite COVID-19, Project Cairo--securitizing about €7.5 billion of a mixed portfolio of secured and unsecured loans--will go ahead as planned. This would make Eurobank the first to utilize HAPS and reduce its NPL exposure to below 20% this year. Furthermore, Eurobank will form a strategic partnership with DoValue to sell its servicing company, Financial Planning Services, maintaining a minority share in it.

National Bank of Greece S.A.   With currently two thirds of its NPL stock being mortgages, NBG is preparing to launch securitizations under the HAPS in excess of €6 billion as soon as market conditions allow.

Piraeus Bank S.A.   In 2019, Piraeus bank launched a strategic partnership with Intrum AB for the servicing of its NPLs. Once conditions improve, Piraeus plans to use the HAPS to securitize €7 billion of residential and commercial NPLs. The prospect is that with projects Phoenix and Vega, the bank will reduce its NPL exposure to below 30%.

Table 1

How Greek Banks Are Responding To COVID-19 Credit Distress

Greek banks intend to sell over €30 billion of NPLs in 2020 using the HAPS. However, recent measures to curtail the spread of COVID-19 could make this ambitious task even more difficult. Most of the four systemic banks have put on hold some of their NPL disposal projects. They plan to resume this activity at the beginning of the third quarter of 2020, but any further delays could affect the NPL reduction strategies already submitted to the SSM. The guarantee provided by the Greek government is expected to last until April 2021, and any extension is subject to an agreement with the SSM. Nevertheless, the European Central Bank (ECB) stated that it will give full flexibility for the implementation of the NPL reduction strategy, which would suggest that an extension might be likely if the COVID-19 disruption lasts for a longer period of time.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

In response to COVID-19, the four systemic banks decided to suspend any loan installments payable for at least three months. The measure applies to performing exposures of SMEs, SBLs, individuals affected, and those whose businesses suspended operations due to the government's emergency measures. For larger enterprises, a longer period of forbearance, between six and nine months, can be granted. The extent of the payment moratorium differs by bank and will be evaluated by case. It is still difficult to project the volume of NPLs resulting from the COVID-19 spread, and we expect figures will be available toward fourth-quarter 2020. The ECB announced flexibility on the treatment of NPLs, in particular to allow banks to fully benefit from guarantees and to be able to grant the moratoriums implemented by the state. In addition, loans that will become nonperforming and that are under state guarantees will benefit from preferential prudential treatment for loss provisioning.

NPL servicers also announced that they will propose tailor-made solutions, including reduction or suspension of installments for three months to all persons and entities affected. This could lead to liquidity concerns or further limit already distressed businesses' ability to comply with restructuring plans.

Credit distress due to COVID-19 also poses risks to the special servicing industry, which is relatively new, does not have an extensive track record, and has significantly increased staff and the number of loans under management. In order to cope with the high volume of loans, a hiring process is underway, which could dilute teams' overall experience. To mitigate this, most of the banks will utilize their in-house NPL management platforms and collaborate with special servicers that have experience servicing NPL portfolios in other countries.

Servicers' business plans rely on the repossession and sale of a large number of properties, and the COVID-19 outbreak could influence both the sale prices and the enforcement procedure. Over the past year, the Greek housing market has been showing some signs of recovery. However, house price increases have mostly been in specific areas within Attica and regions with greater tourism, leaving the rest of the country's house prices in a steady state. At least in the short term, COVID-19 will negatively affect tourism and therefore, property prices could suffer. In addition, we expect COVID-19 to increase unemployment, which will reduce affordability and further constrain house prices. Additionally, all enforcement proceedings, including auctions, are currently suspended, making it difficult to assess the date of resumption. It remains to be seen how quickly the backlog will be reduced, also considering the potential new cases from new defaults.

Finally, for the Greek government to guarantee a transaction, more than 50% of the junior notes have to be sold at a positive value. Given the scheme's timeframe, investor appetite needs to be tested. According to the initial plans, Eurobank will likely be the first to issue a securitization under HAPS. Despite COVID-19, Project Cairo will pave the way and could help gauge whether HAPS will be a success.

Related Research

• The Labors Of Hercules: Still Not Enough To Turn Around Greek Banks, Jan. 27, 2020
• European Nonperforming Loan Markets Under The Spotlight, Nov. 12, 2019