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Virus means tough times ahead for Greek bad debt market, servicers warn banks

Buyers and sellers of bad debts in Greece are in for a bumpy ride in the coming years thanks to the coronavirus pandemic, according to special servicers and investors. But there will be opportunities for deals for those who can hold their nerve.

Greek banks looking to offload debt now, especially in the form of securitizations, may come under pressure to accept lower sale prices, according to Jozef Martinak, chief investment officer of APS Investments, a distressed debt advisory firm. This could mean some tough decisions for banks.

"Banks need to sell at prices that don't hurt them," he said, speaking at a May 14 seminar organized by DD Talks, a webinar series for the distressed debt community.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Herculean effort

Greek banks are coming into the economic turmoil caused by the novel coronavirus outbreak with a large overhang of bad debts from the last credit cycle, and were already coming under pressure from European regulators to clean up their balance sheets. Greek lenders had some €70 billion of nonperforming loans on their books as of the end of 2019, according to the European Banking Authority.

At the time the pandemic hit, Greece's four systemically important banks had been planning to take advantage of government's recently introduced Project Hercules scheme to offload bad debts. This scheme offers a state-backed guarantee on the least-risky slice of the securitized debt.

But the coronavirus outbreak has complicated the picture for both securitized and direct debt sales, according to webinar panelists.

The Greek securitization market is "moving" but banks will have been slowed down because of the pandemic, according to Eleftheria Kyriakopoulou, an Athens-based director at Deloitte.

But Eurobank Ergasias Services and Holdings SA's landmark €7.5 billion Project Cairo securitization is understood to be on track to close by the end of May, she said.

Banks may also have to brace themselves for a new influx of NPLs as the result of the current economic crisis, and might have to adapt new strategies, such as setting up new dedicated NPL divisions or ramping up the pace of debt sales, in order to cope.

"The next three or four years will be pretty busy and challenging in the NPL market," she said.

Pricing

The pandemic will not kill off dealmaking, Kyriakopoulou said.

"When both parties want to make it happen, it will happen. Even if there is renegotiation, or market risk," she said.

But pricing real estate assets underlying bad debts, and making forecasts about how they will perform in future, is set to become a major challenge thanks to the ongoing crisis, which could dramatically change the retail and hospitality industries over the medium to long term, Martinak said.

"How do you price a hotel or a mall that is not generating a profit? If it cannot be repurposed, it's a very difficult asset to re-price. It's not just a matter of timing. If you can't sell an asset in three years, will you be able to sell it in ten years?" he said.

While there should still be appetite from private equity and other funds to buy up bad debts, Greek sellers will have to remember that NPLs are just one choice among many for funds with dry powder.

"Investment in NPLs is one of the many options that PE funds have on the table among others. NPLs are higher risk at the moment, and there are other opportunities out there with better risk-reward profiles," Ilias Kyriakopoulos, chairman and CEO of EuPraxis, a distressed debt management firm said during the webinar.