Greece hosts KKR scheme as NPL market opens

KKR Credit’s European corporate restructuring platform, Pillarstone, is launching in Greece as hopes grow for the emergence of a secondary market in Greek non-performing loans. Following an agreement in May, Alpha Bank and Eurobank (two of the country’s four big banks) will hand management of equity and debt in large Greek corporates to Pillarstone, which will bring new capital and managerial guidance to the firms. 

The Greek entry follows a similar scheme that KKR piloted in Italy last year, when the US private equity company’s credit arm launched Pillarstone, with UniCredit and Intesa Sanpaolo transferring exposures totalling €1 billion into an Italian vehicle. It comes as Greece is enacting laws to spur bad-debt sales alongside the first annual review of its third international sovereign bailout. In May, more restrictions on secondary loan sales were due to end, while Bank of Greece is implementing a new licensing regime for non-bank NPL servicers and acquirers.

Sabina Dziurman, EBRD

As in Italy, Pillarstone will stick to large borrowers with good prospects. A company's minimum debt burden would be between €40 million and €50 million, according to John Davison, Pillarstone’s ex-RBS chief executive and a co-investor. Unlike in Italy, the European Bank for Reconstruction and Development is considering putting €50 million into the platform, while offering up corporate governance advice to the portfolio companies. The EBRD started investing in Greece last year, becoming a shareholder in the big four banks through a €250 million investment.

“There are some really good companies in Greece whose management has done an amazing job of keeping these businesses alive in exceptionally difficult circumstances,” says Davison. “But they are overleveraged and the banks can’t provide them with more capital on their own.”

Pillarstone gets around potential harm to capital ratios from the gap between the loans’ book values and the value international investors could offer in an outright sale, partly due to political and economic risks, says Noel Edison, director in financial institutions at the EBRD. “The Greek platform can bring fresh capital, while allowing the banks to stay invested in strategically-important clients,” says Edison. “It brings the banks a partner with experience of advising on operational turnaround.”

International private equity firms have so far held back on making any large purchases of Greek NPLs, in contrast to Ireland and Spain, where the prevalence of consumer and property-related borrowing makes the underlying risk easier to evaluate. Even in Italy, there are signs of a more active secondary bad-debt market emerging. New government measures to improve collateral-recovery times and back NPL securitizations could help in Italy.

In Greece, the depth of the crisis has pushed back tackling the problem. A BlackRock Solutions study on NPLs commissioned last year by the Bank of Greece found a predominance of short-term forbearance, inadequate portfolio segmentation, and delays in handling loans where the contract has been terminated, among other problems.

Nevertheless, with a third round of capital raisings out of the way following last summer’s bailout, banks may now be able to concentrate more on NPLs, which make up more than 40% of the aggregate balance sheet. “Over the past year the focus was very much on completing the recapitalizations,” says Sabina Dziurman, the EBRD’s Greece director. “The next step for the banks is improving the management of their NPLs and the underlying exposures.”

Michael Fazio, London-based managing director at US investment bank Houlihan Lokey, says the first Greek distressed portfolio sales could happen early next year: once the bailout review is over, more legal measures to improve debt recovery and international investment are passed, and the banks have adequately segmented their loan books.

“There is appetite for Greek NPLs among international private equity firms – many of them have visited Greece many times over and those that have invested in the banks could be looking for follow-on investments,” says Fazio. “It’s a big enough economy to draw interest; what is needed is more confidence in the government and macro-economic risk.” 

Although only a small portion of Greece’s NPL pile, Davison hopes Pillarstone’s Greek scheme will reach about €1.2 billion within two years. He says the other two big banks, National Bank of Greece and Piraeus, could join soon, which should help influence change in the portfolio companies. Pillarstone is already sending two staff to Athens, where the office will be similar in size to its Italian equivalent, which has around 12 people. 

Davison names leisure, retail, agriculture and farming, hotels and imports as examples of the sectors the scheme will target in Greece. “We expect to be involved in a snapshot of the Greek economy,” he says.” HSBC advised Alpha and Eurobank on the deal, with Mediobanca also advising Eurobank.

Meanwhile, Pillarstone is expanding in Italy. In April, Genoa-based Banca Carige joined the platform as part of a €250 million transfer of loans owed to banks by Genoese shipping company Premuda. Davison says Pillarstone has another potential deal of around €350 million which would see a further two Italian banks join, and take the Italian portfolio to more than €1.5 billion.

Premuda fits into the model, according to Davison, due to its good management and efficient, young fleet – even if it is suffering from low dry-bulk rates, like the rest of the shipping sector. He says Premuda can improve its cost structure, and act as a consolidation platform for other indebted European shipping firms. The deal further might tie in with the Greek business, given that country’s large shipping sector.