Trade Alert: Greece

GREECE

Greek Prime Minister Kyriakos Mitsotakis announced on 27 August 2019 that "from today, capital controls are a thing of the past". Christos Staikouras, Greece's new Finance Minister, stated that "restoring free movement of capital will contribute significantly to strengthening confidence [in Greece] and attracting investments…and will lead to further upgrades of the country's credit rating". Capital controls were implemented in June 2015 after disputes with lenders on how to prop up the economy created fears that Greece would fall out of the Eurozone, which led to a run on Greek banks. The European Central Bank ("ECB") then "pull[ed] the plug on emergency funding to Greek lenders" after tensions between the Syriza government (the previous Greek government) and Greece's international creditors escalated over bailout terms.

The lifting of capital controls was one of the pledges of Mitsotakis and the New Democracy party, which won an absolute majority at the 7 July 2019 general election with around 40 per cent of the vote. The Financial Times notes that "[t]here will be satisfaction in EU circles that Greece is swinging back from the populist fringe to the political mainstream,especially given the tide running the opposite direction elsewhere on the continent". The new government has promoted a "liberal, reformist programme" aimed at improving the business environment and appetite for investment in Greece. Mitsotakis has advised that he will make it a priority to support investment plans including Canadian company Eldorado's EUR 1.5bn gold-mining project in northern Greece which has been halted since November 2017 due mainly to environmental permit delays. This project is seen as one of the largest planned developments in Greece for years, and has received overwhelming support from Kostis Hatzidakis, the new Energy Minister. 

Another focus for the new Greek government is the continued reduction of bad debts held by Greek banks. In December 2018, non-performing exposures ("NPEs") stood at around EUR 81.8bn in Greece's banking sector, around 46.7 per cent of the banks' combined loan books. NPEs made up the following percentages of loan books of the four main Greek banks - (i) Piraeus, 49 per cent, (ii) Alpha Bank, 48 per cent, (iii) National Bank of Greece, 41 per cent and (iv) Eurobank, 37 per cent. A March 2019 report held that Greek banks hold the highest proportion of bad loans in Europe with non-performing loans ("NPLs") making up 41.4 per cent of their total assets, compared to 21.4 per cent for banks in Cyprus, 11.5 per cent for Portuguese lenders and 8.4 per cent for Italian banks. The Financial Times noted that although the Greek banks have cut NPEs by around 21 per cent over the last 4 years through write-offs and sales of packages of bad loans, they are struggling to meet rising demand for liquidity as the Greek economy recovers. 

The four main Greek banks raised EUR 13.6bn from 8 sales of NPLs at deep discounts to international funds specialising in distressed assets in 2018, and this trend looks set to continue in 2019. The National Bank of Greece announced in May 2019 that it aimed to reduce its NPL portfolio to around 5 per cent of total loans by 2022, and on 1 August 2019, it announced that it had agreed to sell EUR 1.2bn of unsecured NPLs to CarVal Investors. Piraeus announced a partnership with Intrum Group (a specialist debt collector) in an attempt to reduce EUR 27bn of bad loans that it was holding through various different methods in June 2019. 

This month's Trade Alert considers key legal risks for traders in the Greek loan market.

SPECIAL THANKS

We appreciate the assistance of Vassilis Stergiou and Anastasios Kalergis of Potamitis Vekris with the following discussion of Greek law, regulation and practice.
 

GREEK LEGAL SYSTEM

Greece operates under a civil law legal system, with a unicameral legislature. The legislative branch comprises of the Parliament (Vouli/Koinovoulio) and the President of the Republic (Proedros tis Dimokratias), currently Prokopis Pavlopoulos. 

The predominant legislative function is vested in Parliament, which is required to exercise its power within the bounds of the Constitution. The Constitution is the country's supreme law, although Article 28 provides that ratified international conventions and EU legislation shall prevail over any other provision of law (following its accession on 28 June 1979). 

The Greek Parliament vote for bills (Nomosxedio) to become law (Nomos) in three voting sessions: firstly, in principle, secondly, per article and lastly, as a whole. Once the bill has been passed, it is put before the President of the Republic to declare and publish in the National Gazette (Efimerida tis Kyberniseos).

BANKING LICENCE REQUIREMENTS

There are no banking licence requirements under Greek law for non-resident entities to purchase debt of a Greek borrower that has been granted by a credit or financial institution¹. In practice, however, loans in Greece are generally transferred directly by banks or in the context of securitisations. 

Pursuant to Greek Law 4354/2015 which regulates transfers and servicing of NPEs² (the "NPE Regime")³, the transfer of Greek debt, including performing or non-performing loans, is only permitted where the purchaser of the loan (the "Acquirer") has entered into a servicing agreement with a service provider (the "Servicer") licensed by the Bank of Greece (a "Servicing Agreement"). These conditions are commonly followed when transferring loans granted by a credit or financial institution pursuant to a securitisation regime. An eligible Acquirer can be located in Greece or abroad provided that its registered seat is not located in (i) a state with a favourable tax regime; or (ii) a non-cooperative state (as set out in acts issued under the Greek Income Tax Code).  

Servicers licensed under the NPE Regime are entitled to enforce the rights and claims arising in respect of underlying credit agreements that they manage by virtue of statute. Furthermore, they are also permitted to extend additional finance to Greek borrowers provided that they satisfy certain minimum capital requirements and are specially licensed by the Bank of Greece for this activity. Licensed Servicers that grant new loans are liable for a special charge known as the "Bank of Greece levy" (which is equal to an annual fee of 0.6 per cent of the outstanding amount still left on the loan). Various exemptions apply to this levy, including for loans in the form of Greek bonds.

If a lender is not properly authorised, it will be subject to administrative sanctions, including fines.

METHOD OF TRANSFER

Pursuant to the NPE Regime, transfers are permitted by way of assignment of rights. This is the most commonly used form of transfer as it secures the transfer of any ancillary rights of the loan (including security rights and rights to interest payments) provided that either (i) the borrower is notified of the transfer; or (ii) in the case of a Greek securitisation structure, the transfer is registered with the securitisation registry(which is deemed as notice). 

Novation is not often used as a form of transfer as it carries the risk of releasing existing security and resetting hardening periods.

SECURITY AND TRUSTS / AGENCY

The concept of a trust is not recognised under Greek law and it is not common to use a security agent. However, parallel debt structures (although not expressly provided for under Greek law) are utilised. Following a transfer, certain security (such as security over real estate and certain types of pledges, including pledges over listed shares and non-possessory pledges) should be re-registered in the name of the transferee.

In practice, the majority of term loan facilities to Greek borrowers are structured as bond loans (i.e., through private placement of debt securities) due to the cost and tax exemptions afforded by Greek Law 4548/2018. The bondholder agent holds the security in its own name on behalf of the bondholders and, as such, there is no need for security to be re-registered in the name of the transferee. 

TAX AND STAMP DUTY CONSIDERATIONS

Interest payments by Greek borrowers to foreign tax-resident lenders are subject to a 15 per cent Greek withholding tax, unless a double taxation treaty exists. 

Whilst Greek loan transfers are not subject to Greek stamp duty or VAT, the transfer may trigger capital gains or other income tax liabilities for the account of the transferor (i.e., VAT will apply to fees payable under a Servicing Agreement). 

Bank loans and bond loans are exempt from stamp duty but it is applicable to non-bank loans, at a rate of 2.4 per cent on the total amount of the loan. 

POST-TRANSFER FORMALITIES

Transfers of loans granted by credit or financial institutions are considered to be perfected upon (i) registration of the transfer agreement with the competent pledge registry or (ii) notification to the debtor. In the case of a securitisation, the transfers are perfected only upon the registration of such transfer at the public registry.

 ¹ "Credit institution" and "financial institution" are defined in Greek Banking Law and Regulation (EU) 575/2013.

  ² NPEs are defined by the European Banking Authority (the "EBA") as non-performing exposures that satisfy any of the following criteria: (i) material exposures which are more than 90 days past due; or (ii) the debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past due amount or the number of days past due.

  ³ Under Greek Law 4353/2015, as initially enacted, any loan or credit agreements which are due and unpaid for a period of more than 90 days fall within the definition of "non-performing loan".

INDIA AMENDS INSOLVENCY AND BANKRUPTCY CODE FOLLOWING EQUAL TREATMENT OF UNSECURED AND SECURED CREDITORS IN ESSAR CORPORATE INSOLVENCY RESOLUTION PROCESS

INSOLVENCY LAW UPDATE: INDIA 

ESSAR STEEL LIMITED ("ESSAR")

On 20 August 2019 India's Supreme Court heard the matter of Standard Chartered Bank vs. Satish Kelmar Gupta, R.P. of Essar Steel Limited & Ors, following a stay of the National Company Law Appellate Tribunal (the "NCLAT") judgment in light of amendments to the Insolvency and Bankruptcy Code, 2016.  

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 ("2019 Act") grants greater powers to lenders by, inter alia, allowing banks to decide how the resolution plan bid amount will be distributed as well as which resolution plan will be approved. 

The 2019 Act, in effect, overrides NCLAT's judgment of 4 July 2019 which struck parity between financial and operational creditors by denying secured financial creditors preferential  treatment in distribution of the USD 6bn proceeds from Arcelor Mittal’s takeover of debt-laden Essar. The amendment has been challenged by certain operational creditors as well as the former promoters (the Ruia family), and the Supreme Court has granted two weeks to file a reply.

For further information on these developments, please contact Sankar Swamy and Krishna Venkat at Anoma Legal.

NOTABLE TRANSACTIONS

PUBLIC POWER CORPORATION ("PPC")

On 22 August 2019, recently appointed CEO of Greek PPC, Georgios Stassis, announced that the state-controlled utility's priority was to tackle its “dramatic” cash shortfall of over EUR 750m. PPC is laden with EUR 2.5bn of unpaid customer bills from during Greece’s debt crisis and its cash shortfall has been further aggravated by a rise in CO₂ prices. 

Stassis, who is the former CEO of Italian energy giant Enel’s Romanian subsidiary, has indicated that measures could include changes in pricing, securitising overdue bills and boosting efforts to collect them. These measures are essential to convince accountants, who must sign off on the company’s financial statement for the first half of 2019,not to declare the company insolvent. The challenge will be to develop a formula which reduces PPC's threatening shortfall whilst having a minimal impact on consumers.

In his 3-year-term, Stassis, is also tasked with carrying out a government plan to overhaul PPC, which includes switching from coal to renewables, selling shares in low-voltage distribution networks, and implementing a voluntary redundancy scheme.

FOLLI FOLLIE SA ("FOLLI")

It emerged on 26 August 2019 that Greek luxury jeweller Folli had mandated Deloitte and Savigny Partners to investigate an option to sell its UK-based jeweller, Links of London, which it acquired in 2006.

A July 2019 audit revealed that Folli overstated its 2017 revenue by over EUR 1bn, with a turnover of EUR 359.2m, as opposed to the then-reported EUR 1.4bn. The news coincided with reports of the collapse of the rescue plan proposed by bondholders. Folli has since proposed what it considers to be a "viable alternative" to the company filing for bankruptcy, in the form of a restructuring proposal, expected to receive court ratification by June 2020. This step is key for the firm, which has a EUR 430m debt due this year and in 2021, to avoid collapse.

Folli has been in turmoil since a May 2018 hedge fund report queried its accounting, leading to a EUR 20.3m fine for misrepresenting sales in 2016, the suspension of its shares on the Athens Stock Exchange and  resignation of founder (and 35 per cent stakeholder), Dimitris Koutsoliouts. 

STEINHOFF INTERNATIONAL HOLDINGS N.V. ("STEINHOFF")

On 13 August 2019 Steinhoff announced that it had completed its much-delayed EUR 9bn debt restructuring plan for its European businesses, following a series of extensions. Whilst group Chief Executive Louis du Preez described implementation of the restructuring as a "major milestone" cultivating stability, he warned Steinhoff's only hope for survival was to sell off its EUR 15bn assets and become a retail focused holding company.  

Despite completion of the restructuring, the retailer's market capitalisation suffered an all-time low of EUR 239m on 20 August 2019, which suggests that shareholders are unlikely to recieve proceeds of any future disposals. This is largely due to the "astronomical" EUR 6.2bn litigation hanging over Steinhoff, posing a significant threat to its ability to operate as a going concern. The litigation relates to the accounting scandal that engulfed the company in late 2017, leaving a number of individuals and companies out of pocket and causing the share price to collapse.

RALLYE SA (RALLYE)

Following Rallye's entry into a “procédure de sauvegarde” (safeguard proceedings) in May 2019, the Casino Group outlined plans on 20 August 2019 to target a further EUR 2bn of asset sales by Q1 2021 to cut debt and focus on key markets, such as e-commerce. The sales are in addition to Casino Guichard Perrachon SA's ("Casino") existing plan to sell off EUR 2.5bn of non-core assets by Q1 2020, EUR 2.1bn of which have already been agreed.

The announcement led to shares in Casino rising by 4.7 per cent to a four-month high, making them the leading performer on Paris’ SBF-120.SBF120 equity index. Interestingly, Rallye's shares also rose by 14 per cent, suggesting that dividend payouts will resume once Casino is debt free. The move forms part of Casino's broader restructuring, led by chief executive Jean-Charles Naouri, to shore up the company’s financial performance, which has suffered under the impact of price wars amongst French supermarket operators. 

Click to view the full alert.

Please contact Iden Asl, Hannah Geddes or Tobias Plowman with any queries regarding this month's Trade Alert.