Sunday 6 May 2012

Credit - Peripheral Banks, Kneecap Recap.

"That's the method: restructure the world we live in in some way, then see what happens." - Frederik Pohl

We already touched at length in our past credit conversations on the liability exercise management taken by many weaker peripheral banks in relation to raising capital to reach the 9% Core Tier 1 Capital target set up by the European Banking Association for June 2012 (see our conversations "Subordinated debt - Love me tender?" and "Goodwill Hunting Redux"):
"First bond tenders, then we will probably see debt to equity swaps for weaker peripheral banks with no access to term funding, leading to significant losses for subordinate bondholders as well as dilution for shareholders in the process." - Macronomics - 20th of November 2011.

In 2011 as well as very recently, bond tenders have been a recurring theme in the credit space.
As a reminder on bond tenders:
Debt tender offer:
"When a firm retires all or a portion of its debt securities by making an offer to its debt holders to repurchase a predetermined number of bonds at a specified price and during a set period of time. Firms may use a debt tender offer as a mechanism for capital restructuring or refinancing."

We believe additional debt to equity swaps will have to happen for weaker peripheral banks, similar to what we witnessed with Banco Espirito Santo in October 2011, as well as for German bank Commerzbank ("Schedule Chicken" - 25th of February 2012).

We wrote in October 2011 relating to bond tenders and the move towards debt to equity swap:
"We expected others to follow suit and given the difficulty for the weaker players in the peripheral space to access capital at a reasonable rate, as well as needing to boost their core Tier 1 capital base, it was of no surprise to see Portuguese bank Banco Espirito Santo following French bank BPCE in tendering some of its subordinated debt on the 18th of October, but this time around, we have a debt to equity swap."

Banco Espirito Santo stock price evolution - source Bloomberg:
Survival of the fittest...On October 18 Banco Espirito Santo announced a capital increase in effect via its bond tender which meant at the time a 83.5% dilution for shareholders. This was followed by another capital increase of 1 billion euro announced mid-April, to be completed by early May (see our conversation "All Quiet on the Western Front").
According to recent note by CreditSights (Euro Financial Movers - Walking on Eggshells - 15th of April 2012):
"Unnamed major shareholders have committed to subscribe just over half of the amount (50.63%), and the remainder is underwritten by a syndicate of banks. On an FY11 pro-forma basis, this will take BES's Core Tier 1 ratio to over 10.5% and allow it to meet the EBA's end-June requirement of 9 Core Tier 1. The consolidated EBA shortfall for BES's parent, Espirito Santo Financial Group, is €1,597 mln."

All clear for Banco Espirito Santo, but definitely not for its Portuguese peer, Banco Comercial Português (BCP):
"Banco Comercial Portugu√™s has yet to give details of how it will cover a shortfall of €2.1 bln identified by the EBA. There is a €12 bln government recapitalisation facility available to Portuguese banks under the bailout package." - CreditSights - Euro Bank Capital Model FY11: We Are The 9%, 2nd of May 2012.

When it comes to BCP, a debt to equity swap could be a solution if we take a look at the stock price - source Bloomberg:
Not pretty to say the least...

When it comes to Greek banks, they are in the front line (see our post "Liquidity? The IV Greek Credit Therapy").
Lack of capital follows the results of the Greek PSI, leaving them with dire needs as indicated by Marcus Bensasson, Maria Petrakis and Natalie Weeks
in their article on Bloomberg on the 20th of April - Top Greek Banks Post $37 Billion in Losses on Debt Restructuring:
Greece’s four biggest banks reported a combined loss of 27.9 billion euros ($36.9 billion) for last year after participating in the country’s debt exchange, the largest sovereign restructuring in history.
The four, including National Bank of Greece, EFG Eurobank Ergasias SA, Alpha Bank SA and Piraeus Bank SA, said they wrote down about 25 billion euros in the combined value of their Greek government bond holdings.
Prime Minister Lucas Papademos is trying to finalize a plan to recapitalize Greek banks, which wrote down more than half the face value of their government bonds and posted an increase in bad loan ratios after five years of recession. Greece’s bank-recapitalization body yesterday got 25 billion euros in a first tranche of funds, or half the total assigned for the purpose, as part of a second bailout by the European Union and International Monetary Fund."

And the Bloomberg article to add:
"National Bank, the nation’s biggest lender, had a net loss of 12.3 billion euros for 2011 after a 406 million-euro profit a year earlier, the Athens-based lender said in a statement today. The average estimate from three analysts surveyed by Bloomberg News was for a loss of 9.29 billion euros.
EFG Eurobank Ergasias SA, the second-biggest lender, had a 5.51 billion-euro loss after a 68 million-euro profit in 2010 and Alpha Bank SA, the third biggest, lost 3.81 billion euros after an 86 million-euro profit in 2010. Piraeus Bank SA, the fourth largest, had a 6.3 billion-euro loss.
National Bank took 10.8 billion euros of post-tax impairments on Greek government bond holdings after writing down their value by 75 percent. Eurobank wrote down 4.6 billion euros of government bonds after taxes and Alpha Bank 3.8 billion euros. Piraeus wrote down 5.1 billion euros."
Another nice job done by "analysts"...

So, no surprise for us to hear recently about the bond tender exercise being followed by Greek bank Alpha Group Limited:
"Alpha Group Limited (the "Offeror"), a member of the Alpha Bank A.E. group (the "Group) announced today tender offers (the "Offers")for Any and All of two Tier One Securities, one Upper Tier II Security and two Lower Tier II Securities ("Securities") with an aggregate face amount outstanding of approximately EUR 985mm."

For similar purposes as all other bond tenders we have seen so far, namely to boost Core Tier 1 Capital:
"The purpose of the Offers is to generate Core Tier One capital for the Group and to strengthen the quality of its capital base. If completed, the Offers would generate a gain for the Group and thereby increase Core Tier One capital. The Offers also provide investors with an opportunity to monetise their investments at the relevant Purchase Price."
Opportunity for the bondholders to "get to the exit while they can" and take their losses...
Alpha Bank SA offered to buy back a nominal 1.58 billion euros of outstanding securities in a bid to boost its capital. If completed, this offer would generate a gain for the group’s Core Tier 1 capital, which the bank reported at 3 percent for 2011 according to Bloomberg, when the target is 9% for June 2012 for European banks as required by the European Banking Association plan but, for Greek Banks, they have until September 2012 for achieving the 9% required. In 2011, during the last EBA stress tests for European banks, 30 billion was assigned to Greece's banking system out of the 115 billion original EU-wide bailout plan.

Alpha Bank stock price - 24th of April 2012 - source Bloomberg:

ASE - Greek stock index evolution - 24th of April - source Bloomberg:
From our conversation "Equities, there's life (and value) after default!", we know that the outstanding weight of "Financials" in the ASE Greek index, is roughly around 21.70%. We wrote at the time:
"Given the outstanding weight of financials in the Greek ASE index and knowing their current Greek debt holdings, Alpha Bank, National Bank of Greece, EFG Eurobank and Piraeus bank respective equity is probably worth zero. It should in theory equate to an additional write down of at least 16.74% of the ASE Greek index."

The same Bloomberg article also indicated the following in relation to Greek Banks Core Tier 1 ratios:
"National Bank, Eurobank and Piraeus Bank did not disclose what their Core Tier 1 ratios would be without support from the Hellenic Financial Stability Fund, the state recapitalization body. National Bank reported a Core Tier 1 capital ratio of 6.3 percent after an injection of 6.9 billion euros from the HFSF.
Agricultural Bank of Greece SA and TT Hellenic Postbank SA, two state controlled lenders, were granted extensions and will report earnings by May 31, the banks said in exchange filings.
The bank recapitalization plan includes incentives for private investment such as rights for shareholders to purchase the government’s stake and safeguards for buyers of convertible bonds, according an IMF report released March 16. The HFSF will continue to hold voting rights in the event of strategic decisions related to the banks to avert the risk of asset stripping by investment funds, according to the report."

When it comes to rising pressure in relation to the need for fresh capital, it could not be more truer given the significant rise in non-performing loans as reported by Bloomberg on the 4th of May:
"Greek banks collectively saw the level of non-performing loans rise to 17 percent of their total loan portfolio at the end of the first quarter from 14.7 percent at the end of the third quarter of 2011, Kathimerini reported.
Bad mortgages climbed to 16 percent of the total, or 12.5 billion euros ($16.4 billion), from 14 percent, the Athens-based newspaper said today, citing Greek banking officials. Bad consumer loans increased to 29 percent, or 9.6 billion euros, from 26.4 percent and bad business loans nose to 15 percent, or 18 billion euros, from 13 percent, it said." - source Bloomberg, Paul Tugwell.

So what is the plan for Greek banks? So far no plan...
"Greece’s government has yet to settle on the final terms to recapitalise the nation’s banks after a 100 billion-euro writedown of sovereign debt, said an official at the Hellenic Financial Stability Fund.
Agreement still needs to be reached on a number of different issues and this may not occur before May 6 elections, the official, who declined to be named, said after a meeting in Athens between Panayotis Thomopoulos, the head of the fund, and Prime Minister Lucas Papademos.
The official said he hoped the full 50 billion euros allocated to the fund wouldn’t need to be used and that an initial 18 billion euros had been provided to the four biggest Greek banks in the form of commitments." - source Bloomberg, Eleni Chrepa - 24th of April 2012.

The HFSF (Hellenic Financial Stability Facility) total 13 billion, 1.3 billion for Alpha Bank, 4.2 billion for EFG Eurobank, 6.9 billion for National Bank of Greece (who had the largest holding of Greek bonds on its balance sheet). According to CrediSights, these facilities allow the banks to report total capital ratios of at least 8% under the current EU Capital Adequacy Directive, which in turn makes them "officially solvent" and therefore "eligible" for ECB funding...
Looking at the outcome from the Greek elections on the 6th of May with the losses of pro-austerity parties, it spells trouble ahead for Greece and its ailing financial system, resorting to desperation tactics like
-suing Reuters News agency:
"Greek bank sues Reuters over investigative report" - Reuters, 2nd of May.
"One of Greece's biggest banks has filed a lawsuit against Reuters claiming 50 million euros ($66 million) in damages over a story that exposed a series of property deals between the bank and companies run by the family of its executive chairman."
-making desperate appeal for fresh private equity to avoid total shareholder equity wipeout:
"Apostolos Tamvakakis, chief executive of National Bank of Greece, launched a last-ditch attempt to fend off a wipeout of private shareholder control, widely considered inevitable across the banking system as lenders struggle to absorb losses on their government bond holdings and other bad debts." - Financial Times, Patrick Jenkins, Banking editor - Greek banks appeal for fresh equity.

We believe debt to equity swaps will likely happen for weaker banks as well as full nationalisation for some.
As our good credit friend said in November 2011: 
"The path will be very painful for both shareholders and bondholders."
30% of National Bank of Greece shares are in the hands of foreign investors such as Bank of New York Mellon, BlackRock, Allianz, Pictet, Prudential Financial, Aviva, AXA, HSBC and BBVA, according to Bloomberg data.

"When liberty is taken away by force it can be restored by force. When it is relinquished voluntarily by default it can never be recovered." - Dorothy Thompson
Stay Tuned!


  1. Hi,

    Great post as usual.

    Re Banco Espirito Santo, you mention that it is all good for BES (in the sense that they got their rights issue away - even though they helped Credit Ag with their subscription by buying the insurance company off them). Do you think that BES is out of the woods - or is the macroeconomic environment so bad in its home country/its loan exposure mean that there are more shoes to drop?

    I appreciate your thoughts!


  2. Hi jbs, I do not think BES is out of the woods yet. There are indeed more shoes to drop in Europe. It is a game of survival of the fittest. We will see an acceleration in the consolidation and some banks will go down. The problem being the higher leverage of European banks versus American banks as well as the lack of decent equity buffer to absorb losses in most banks (US and European banks), check Admati's work on the subject.



  3. Also jbs from Bloomberg, see below:
    "Banif, BPI, Caixa Hand In Recapitalization Plans, Diario Reports
    2012-05-16 06:53:59.43 GMT

    By Joao Lima
    May 16 (Bloomberg) -- BPI, Banif and Caixa Geral de
    Depositos have handed in their recapitalization plans to the Bank of Portugal, Diario Economico reported, without saying how it obtained the information.
    * Banks’ plans to be used in government negotiations: Diario
    * NOTE: Banco Comercial on May 7 said capital needs are EU2.5b
    {NSN M3O34K0D9L35 }
    * NOTE: BPI on April 20 said capital needs may be EU1.4b
    {NSN M2SFAJ6S9728 }



  4. Thank you so much for your reply, Martin. I only just found your blog. Please keep up the good work.

    Interestingly, from a trading point of view (with the benefit of hindsight) - the trade with BES around the rights issue would have been to purchase the shares post the rights issue announcement after they dropped, and then sold the rights to lower your cost base. But, that is playing in front of a steamroller really. (See Third Point's summary of a similar trade with Unicredit. They may have gotten lucky with that.)

    I enjoyed Admati's article, thanks.


  5. Yep, that's the idea but you have to be cautious with this kind of trades.




View My Stats