The third phase of the Hercules Asset Protection Scheme (HAPS) in Greece has been expanded to include €3 billion in government guarantees to support NPL securitization transactions.
By Michael Marray
The European Union is keeping a close eye on the risks associated with the accumulation of bad loans on bank balance sheets. Regulators at national and EU levels are putting continued pressure on bank management to ensure that bad loan levels do not skyrocket again.
There are also efforts to create a more efficient market for banks to sell non-performing loans. The EU Directive on credit servicers and credit buyers (the NPL Directive) had to be transposed into national law by the end of 2023, and national regulators have now issued licenses to credit servicers (see second report).
On September 17, Greek Economy and Finance Minister Kostis Hatzidakis announced a €1 billion increase in the Hercules III program. Hercules III, the third phase of the Hercules Asset Protection Scheme, was launched at the beginning of the year with government guarantees worth €2 billion, bringing the program volume to €3 billion. The EU Commission’s competition watchdogs consider HAPS to be “free of state aid” because the prices for the guarantees are based on market conditions, i.e. a fee is charged based on the prices of state credit default swaps.
The government guarantee relates to the senior bonds, so the bank receives capital relief by retaining a zero risk-weighted tranche. The mezzanine and junior notes are sold to investors with the bank retaining a position so that the interests of the bank and investors are aligned. Experience shows that state guarantees of EUR 3 billion are likely to support the securitization of non-performing loans worth around EUR 10 billion.
“The HAPS III terms are more restrictive as the credit rating requirements for the government-guaranteed tranche have been increased by two notches to BB (high) or equivalent,” explains Vassilis Panaghoulis, Assistant Vice President, European NPL Ratings at Morningstar DBRS. “So far we have seen two transactions under HAPS III, Sunrise III from Piraeus Bank and Frontier II from NBG.”
More deals in preparation
According to the Bank of Greece’s April 2024 Financial Stability Review, the four systemically important banks (Alpha Bank, Eurobank, National Bank of Greece and Piraeus Bank) all reached single-digit NPL ratios at the end of 2023, with three of them having ratios below 5%, while the small Greek banks, the so-called less significant institutions, still have a high ratio of 37.6%.
The Big Four’s balance sheets have been cleaned up to such an extent that the government has sold shares it had acquired during the financial crisis. The most recent sale, a 10% stake in NBG, was completed just a few days ago, with the share offering heavily oversubscribed.
“HAPS has proven to be an effective tool for banks to improve their balance sheets, as it was the main reason for their NPL ratios to return to single digits,” said Panaghoulis. “While the first two HAPS programs were intended to provide relief to the four systemically important banks, the third extension aims to also improve the asset quality of the Less Significant Institutions that still have significant NPLs on their books.”
“The goal was to clean up bank balance sheets so that banks could make new loans and support the economy,” says Panaghoulis. “We are still at an early stage in terms of loan resolution and resolving these exposures will take time. As a result, the focus now shifts to loan processing companies and their ability to carry out their duties. However, unlike the Italian GACs transactions, the HAPS transactions are private, so little data is available.
The program in Italy
The HAPS program was developed along the lines of the Italian GACS structure. All GACS transactions had to be rated and sold on the public securitization market. Therefore, there is a large amount of data on the performance in calculating the gross book value of the €130 billion of bad loans that were moved off bank balance sheets.
The GACS program began in 2016, also with the approval of the EU Commission with regard to state aid rules, and was extended in 2019. Although there were talks between Rome and Brussels about a further phase in early 2023, this never materialized.
“Since the end of the GACS program in 2022, issuance of NPL securitizations has declined significantly,” says Paula Lichtensztein, analyst at Scope Ratings. “The GACS program has helped to significantly reduce the stock of NPLs on banks’ balance sheets,” she adds. “Now that Italian banks have much lower NPL ratios, they are more likely to manage NPLs internally or through private sales.”
Most recoveries occur through legal proceedings where the collateral is repossessed. There are also discounted pay offs (DPOs) and so-called note sales, where specialized buyers bid for specific loans in the NPL portfolios.
However, the experience in Italy suggests that debt recovery under the HAPS program in Greece may be slower or agreed at a lower level than expected.
