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Greece's Project Hercules could repeat successes of Italy's GACS scheme

Greece's proposed asset protection program, dubbed Project Hercules, could repeat some of the successes of Italy's GACS scheme, according to analysts.

Greek banks are grappling with a €75 billion pile of bad debt as of end-June, according to DBRS Morningstar, which was accrued in the years following the 2008 global financial crisis. Under the asset protection scheme, banks would be able to use state guarantees to back the securitization of portfolios of nonperforming loans. Bad loans would be moved to a special purpose vehicle that would issue senior, mezzanine and junior bonds, with the least risky notes to be backed by the government. Project Hercules could help banks cut their bad debt burden by €30 billion, according to industry insiders.

The scheme has similarities to Italy's Guarantee on Securitization of Bad Debts scheme, which has already helped banks shed more than €62 billion of bad debt since its inception in 2016. GACS also allows banks to securitize bad debts with a guarantee on the least risky portion of debt. Italian banks given a helping hand by GACS include troubled lender Banca Monte dei Paschi di Siena SpA, which concluded the securitization of a €24.1 billion bad debt portfolio in 2018.

The European Commission approved Hercules on Oct. 10, but the Greek government has yet to pass it into law.

Sufficient demand

There is a sufficient level of demand from international investors to mop up the bonds that will be created from Project Hercules securitizations.

"From our experience so far there are a number of potential investors seeking to buy NPL portfolios or securitized notes backed by NPLs," an Athens-based equity analyst said, speaking on condition of anonymity.

Specialist NPL investors such as Intrum AB (publ) and hedge funds or private equity funds such as Bain Capital LP, Fortress Investment Group LLC and Lonestar Capital Management LLC are likely to be interested in snapping up some of the debt, the analyst said. More traditional credit funds such as Pacific Investment Management Co. LLC (PIMCO) should also be interested.

"We are of the view, that there is sufficient demand and that the majority of the NPLs that will be up for sale will be acquired by foreign institutional investors," the analyst said.

Gordon Kerr, senior vice president, head of European research, global structured finance at DBRS, agreed, but with the caveat that the price has to be right.

"As happened with Italy, there are a number of interested parties, but purchases will depend on the price point that they can achieve. Those interested are also similar players to those that have participated in Italy, including international hedge funds and specialist investors," Kerr said in an email.

Transformation will take time

The DBRS house view on Hercules is that while it will not "immediately transform" Greece's economic situation, the scheme should help banks to work through their debt pile, it said in an Oct. 17 note.

Out of Greek banks' remaining NPLs, 57%, or €42.7 billion, are in the business sector and about a third, or €24.8 billion, are from residential property, according to DBRS, quoting Bank of Greece data. The remaining €7.9 billion, or 10%, is consumer debt.

As well as Hercules, Greek banks should also benefit from a new piece of legislation, the Greek Primary Residence Protection Scheme, which the European Commission recently approved, DBRS said.

The scheme, which has an annual budget of about €132 million, supports home owners struggling with their mortgages to continue paying their debts, rather than going into default. It replaces the Katseli Law, an earlier piece of legislation with a similar aim, and has slightly stricter eligibility criteria in terms of property value and borrower income. Under the new law, borrowers would get a grant equal to 20% to 50% of their monthly repayment on the understanding that they keep repaying the remainder or face foreclosure.