Article / 16 October 2015 at 14:36 GMT

Greek banks eye debt/equity swap gamble

Managing Partner / Spotlight Group
United Kingdom
  • Greek banks see debt/equity swaps as means to restructure balance sheets
  • Some investors may prefer equity to a deep haircut on debt
  • Eurogroup wants bondholders to take losses before public funding is deployed
  • Fate of Greek banks is tied to government's will for reform
Greek banking clients
 People line up to withdraw cash from an ATM at a closed bank 
in Athens, July 2015. Photo: iStock

By Stephen Pope

Greek banks are looking to debt-to-equity swap arrangements as an attractive way to restructure their balance sheets, but the fate of those financial institutions will depend on the government moving forward with real reforms of Greece's troubled economy.

In July, Greek banks re-opened after a three-week closure triggered by the deadlock over the country's debt. During this time, the limit for cash withdrawals at ATMs was set at a maximum of €60 a day. The restriction was imposed amid fears of a run on banks as depositors would clamour to withdraw their savings.

Now, while the ending of the bank closures was reason to be cheerful, it would have been a grave mistake to assume these banks and the wider Greek economy were remotely near recovery. Major restrictions were still in play, limiting bank customers' access their money and ability to move it around.

The effect of the European Central Bank turning on the emergency lending assistance again was merely a fig leaf of protection. The flow of €900 million was simply enough to keep the Greek banks breathing while on life support.
The hard reality is that there is no possibility of them thriving for months and even possibly years. In fact the financial position of the banks has become so fragile that once proud banking institutions are seeking to swap unsustainable debt for equity instead.

Repairing the balance sheet

As a result of the continuing financial and economic crisis in Greece and the Greek banking system, the banks have judged that a debt-equity swap arrangement has become an attractive means of restructuring their balance sheets.

This option means that claims by creditors may in the future also be converted to shareholder and partnership rights in the debtor institution as part of insolvency plan proceedings.

Converting debt into equity can be a key component of restructuring an institution that is experiencing financial difficulty. A debt-for-equity swap involves a creditor converting debt owed to it by a distressed institution into equity issued by that institution.

A debt-for-equity swap may be appropriate where an institution is
• experiencing solvency problems but is still ultimately viable
• over-leveraged
• unable to obtain capital financing

Eurobank Ergasias SA and Alpha Bank AE are looking at a proposal that would ask debt holders to swap notes for shares, and National Bank of Greece SA, which also attended the meeting in Athens, may also consider a bond swap, depending on the price in its sale of Turkish unit Finansbank AS.

They would be following Piraeus Bank SA which yesterday issued a proposal of terms for an exchange to investors with about €600 million of bonds on their books.
debt equity swap
 Source:, Spotlight Ideas

Up to €25 billion of the new money in the third bailout package for Greece was identified as funds to backstop the recapitalisation of banks. However, in a world where high-yield debt carries high risk, the Eurogroup of finance ministers said in August that Greek bank bondholders may have to take losses before public money is used. I can find no fault with that position.

A deal to be done

Greek banks’ senior unsecured notes rose by as much as 16% on Thursday after the Piraeus Bank bond-swap offer. Prices for Alpha Bank’s €400 million notes due in June 2017 rose to 74 cents on the euro, and National Bank’s €750 Million notes due in April 2019 rose to 69 cents. Clearly speculators have caught the scent of a profit.

Alpha Bank is considering targeting holders of more than €1 billion of senior and junior unsecured bonds. This must be seen by investors as preferable to a major haircut or just holding onto debt that over time will see its value erode in the market.

One could counter and suggest that the equity investors get in exchange is quite poor and of limited value. But equity is issued on an ongoing basi and it is perpetual unless the issuer literally goes bust or is acquired. One may never have to realise any capital loss.

It seems that debt-equity swaps are a good current proposal, though without full details of the balance sheets one cannot say how effective such a restructuring will be or whether it will be possible to transform the risk profile of banks that may be still fettered by exposure to unperforming loans and deeply discounted Greek government bonds.

Fate of Greek banks tied to reform

With restructuring of balance sheets, one would hope that banking improvements would be made easier. If the banks’ bad assets (including sovereign debt haircuts) were written off and the €25 billion of the bailout money directly deployed to engineer the recapitalisation of the Greek banking system, then a return to sound banking practice would certainly be made easier.

The proviso is that unless the Greek government moves ahead without delay and tackles the structural flaws of the economy and allows state assets to be privatised, then consistent economic growth will not be achieved. The prime minister's Syriza party must govern, not just be a force of protest.

Without sustained economic growth, unemployment will remain high and that will not breathe any life into the banking sector. And that will cause a problem as, after the first €25 billion injection, no further Greek or Eurozone taxpayers’ money should be used to recapitalise the Greek banks.

It should be bank shareholders and bondholders who foot the bill. If they are bold enough to snap up Greek banks' debt today hoping for a swap-driven turn, then they had better be big enough to bear any burden if the banks start to buckle.

My warning is this: Greek banks and politics are heavily intertwined; only get involved if you have faith in Prime Minister Alexis Tsipras and his desire to be a realistic reformer not just a radical rebel. If you have that faith, then you are braver than me.

 The cradle of Western democracy, but not the birthplace
 of sound financial housekeeping. Photo: iStock

– Edited by John Acher

Stephen Pope is managing partner at Spotlight Ideas.


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