Greece Sets Terms for Aiding $15.9 Billion Bank Recap

Nikos Chrysoloras

November 2, 2015 — 2:42 AM EET Updated on November 2, 2015

Greece’s government detailed under what terms it will help banks plug a 14.4 billion-euro ($15.9 billion) hole in their books identified by the European Central Bank, paving the way for the lenders to seek cash from investors for the second time in 18 months.

The ECB expects the banks to raise at least 4.4 billion euros from shareholders and bondholders, sufficient to meet the shortfall identified under baseline macroeconomic assumptions in its Asset Quality Review, the Frankfurt-based supervisor said Saturday. The state-owned Hellenic Financial Stability Fund is ready to inject the 10 billion euros identified in the ECB’s adverse scenario, offering 25 percent through common shares with full voting rights in the lenders, and the rest via contingent convertible securities, according to a government statement released late on Sunday night, in Athens.

The mix between shares and CoCos for the state’s participation in the capital raising plans will largely determine the ownership structure of battered lenders, and therefore investors’ appetite to chip in. U.S. billionaire Wilbur Ross, who holds a stake in Eurobank Ergasias SA, said Saturday Greece should only inject funds through CoCos to prevent the dilution of the stakes held by existing shareholders, which have already dropped about 70 percent this year.

“Investors will not be comfortable with committing new equity capital to banks that are effectively nationalized,” Ross said in a statement. “Since it was the actions of government that caused the imposition of capital controls and since these in turn have led to the need for equity, it would be nonsensical for the government now to dilute shareholders.”

If private investors’ funds fall short of the hole identified in the baseline scenario, then the HFSF’s participation in the capital injection will take place through common shares for the remaining amount of the baseline scenario, on top of the injection for the adverse scenario of 25 percent common shares, 75 percent CoCos, according to as proposal from the government’s economic policy team which has been submitted to the cabinet for approval.

Bank stocks rallied on Monday, with the benchmark FTSE/Athex Banks Index gaining 13.4 percent at 11:32 a.m. in Athens. Alpha Bank AE shares rose 24.4 percent while Eurobank jumped 25.8 percent.

Greek banks cleared the hurdle of a pan-European review in 2014 thanks to capital increases totaling over 8 billion euros, and restructuring plans approved by the European Commission, only to see their solvency put to the test after six months of wrangling between the anti-austerity government of Alexis Tsipras and its creditors this year. The standoff resulted in the imposition of capital controls and restrictions on ATM withdrawals, as well as a month-long forced bank holiday in July.

Banking Review

The asset-quality review carried out by the ECB resulted in valuation adjustments of 9.2 billion euros for the National Bank of Greece SA, Piraeus Bank SA, Eurobank and Alpha Bank, the Frankfurt-based supervisor said Saturday. The banks’ capital gap amounted to 14.4 billion euros under a simulated stress test scenario, and 4.4 billion euros under baseline macroeconomic assumptions. The four banks will have to submit recapitalization plans to the ECB’s supervisory arm by Nov. 6.

The overall bill of the stress test was within market expectations, according to analysts. “The stress test results of the Greek banks, especially under the baseline scenario, are encouraging enough,” said Panos Xidonas, associate professor of finance at ESSCA, an Angers, France-based management school.

Lenders have bled about 43 billion euros in deposits over the past 12 months amid doubts over Greece’s place in the European currency bloc. They reported net losses totaling over 4.6 billion euros so far this year in bourse filings on Saturday, amid increases in bad loans, expensive emergency funding requirements from the ECB, and a “challenging macroeconomic environment.”

Bank managers said, after the stress test release, that they will try to use private funds to cover most of the gap identified in the ECB’s exercise.

“The National Bank of Greece intends to raise the capital required, with as much capital as possible from private sources and its own capital actions so as to significantly minimize need for state aid and consequent burden on Greek debt,” Chief Executive Officer Leonidas Fragkiadakis said in a statement after the results. Piraeus Bank’s plan for meeting ECB requirements following the stress results “involves raising capital from private investors, and other secondary actions,” the Greek lender’s CEO Anthimos Thomopoulos said on Sunday.

Whether they will succeed will largely depend on whether the government will provide clarity regarding the ultimate capital structure and the extent of its participation in the governance of the banks, according to Ross.

“As an investor in Eurobank we would like to be part of the solution to the bank’s capital needs,” he said. “I hope government participation here, if any, will be in a form that will give professional investors the confidence to do so.”

Regular Evaluations

According to a new recapitalization bill, approved by Greek lawmakers on Saturday, the HFSF will regularly evaluate the management of Greek lenders that seek state aid, and will have the power to block strategic decisions.

Common and preferred stock as well as other financing instruments, including unsecured senior liabilities, can be bailed in before a financial institution is eligible to use the public backstop of the state-owned recapitalization fund to cover its shortfall, according to the bill. Eurobank, Alpha Bank, and Piraeus have already extended swap offers to their bondholders as they seek to reduce liabilities and boost their capital. National Bank announced a tender for investors to swap bonds for shares on Monday, citing the capital shortfall identified in the ECB test. The government said on Sunday that if the HFSF participates in a capital increase of a bank, then its preferred stock will also take part in the burden sharing.