We already touched at length in our past credit conversations on the liability exercise management taken by many weaker peripheral banks in relation to raising capital to reach the 9% Core Tier 1 Capital target set up by the European Banking Association for June 2012 (see our conversations "Subordinated debt - Love me tender?" and "Goodwill Hunting Redux"):
"First bond tenders, then we will probably see debt to equity swaps for weaker peripheral banks with no access to term funding, leading to significant losses for subordinate bondholders as well as dilution for shareholders in the process." - Macronomics - 20th of November 2011.
In 2011 as well as very recently, bond tenders have been a recurring theme in the credit space.
As a reminder on bond tenders:
Debt tender offer:
"When a firm retires all or a portion of its debt securities by making an offer to its debt holders to repurchase a predetermined number of bonds at a specified price and during a set period of time. Firms may use a debt tender offer as a mechanism for capital restructuring or refinancing."
We believe additional debt to equity swaps will have to happen for weaker peripheral banks, similar to what we witnessed with Banco Espirito Santo in October 2011, as well as for German bank Commerzbank ("Schedule Chicken" - 25th of February 2012).
We wrote in October 2011 relating to bond tenders and the move towards debt to equity swap:
"We expected others to follow suit and given the difficulty for the weaker players in the peripheral space to access capital at a reasonable rate, as well as needing to boost their core Tier 1 capital base, it was of no surprise to see Portuguese bank Banco Espirito Santo following French bank BPCE in tendering some of its subordinated debt on the 18th of October, but this time around, we have a debt to equity swap."
Banco Espirito Santo stock price evolution - source Bloomberg:
All clear for Banco Espirito Santo, but definitely not for its Portuguese peer, Banco Comercial Português (BCP):
"Banco Comercial Português has yet to give details of how it will cover a shortfall of €2.1 bln identified by the EBA. There is a €12 bln government recapitalisation facility available to Portuguese banks under the bailout package." - CreditSights - Euro Bank Capital Model FY11: We Are The 9%, 2nd of May 2012.
When it comes to BCP, a debt to equity swap could be a solution if we take a look at the stock price - source Bloomberg:
When it comes to Greek banks, they are in the front line (see our post "Liquidity? The IV Greek Credit Therapy").
Lack of capital follows the results of the Greek PSI, leaving them with dire needs as indicated by Marcus Bensasson, Maria Petrakis and Natalie Weeks
in their article on Bloomberg on the 20th of April - Top Greek Banks Post $37 Billion in Losses on Debt Restructuring:
And the Bloomberg article to add:
"National Bank, the nation’s biggest lender, had a net loss of 12.3 billion euros for 2011 after a 406 million-euro profit a year earlier, the Athens-based lender said in a statement today. The average estimate from three analysts surveyed by Bloomberg News was for a loss of 9.29 billion euros.
EFG Eurobank Ergasias SA, the second-biggest lender, had a 5.51 billion-euro loss after a 68 million-euro profit in 2010 and Alpha Bank SA, the third biggest, lost 3.81 billion euros after an 86 million-euro profit in 2010. Piraeus Bank SA, the fourth largest, had a 6.3 billion-euro loss.
National Bank took 10.8 billion euros of post-tax impairments on Greek government bond holdings after writing down their value by 75 percent. Eurobank wrote down 4.6 billion euros of government bonds after taxes and Alpha Bank 3.8 billion euros. Piraeus wrote down 5.1 billion euros."
Another nice job done by "analysts"...
So, no surprise for us to hear recently about the bond tender exercise being followed by Greek bank Alpha Group Limited:
For similar purposes as all other bond tenders we have seen so far, namely to boost Core Tier 1 Capital:
Alpha Bank stock price - 24th of April 2012 - source Bloomberg:
ASE - Greek stock index evolution - 24th of April - source Bloomberg:
Equities, there's life (and value) after default!", we know that the outstanding weight of "Financials" in the ASE Greek index, is roughly around 21.70%. We wrote at the time:
The same Bloomberg article also indicated the following in relation to Greek Banks Core Tier 1 ratios:
When it comes to rising pressure in relation to the need for fresh capital, it could not be more truer given the significant rise in non-performing loans as reported by Bloomberg on the 4th of May:
"Greek banks collectively saw the level of non-performing loans rise to 17 percent of their total loan portfolio at the end of the first quarter from 14.7 percent at the end of the third quarter of 2011, Kathimerini reported.
Bad mortgages climbed to 16 percent of the total, or 12.5 billion euros ($16.4 billion), from 14 percent, the Athens-based newspaper said today, citing Greek banking officials. Bad consumer loans increased to 29 percent, or 9.6 billion euros, from 26.4 percent and bad business loans nose to 15 percent, or 18 billion euros, from 13 percent, it said." - source Bloomberg, Paul Tugwell.
So what is the plan for Greek banks? So far no plan...
The HFSF (Hellenic Financial Stability Facility) total 13 billion, 1.3 billion for Alpha Bank, 4.2 billion for EFG Eurobank, 6.9 billion for National Bank of Greece (who had the largest holding of Greek bonds on its balance sheet). According to CrediSights, these facilities allow the banks to report total capital ratios of at least 8% under the current EU Capital Adequacy Directive, which in turn makes them "officially solvent" and therefore "eligible" for ECB funding...
Looking at the outcome from the Greek elections on the 6th of May with the losses of pro-austerity parties, it spells trouble ahead for Greece and its ailing financial system, resorting to desperation tactics like
-suing Reuters News agency:
"Greek bank sues Reuters over investigative report" - Reuters, 2nd of May.
We believe debt to equity swaps will likely happen for weaker banks as well as full nationalisation for some.
As our good credit friend said in November 2011:
"The path will be very painful for both shareholders and bondholders."
30% of National Bank of Greece shares are in the hands of foreign investors such as Bank of New York Mellon, BlackRock, Allianz, Pictet, Prudential Financial, Aviva, AXA, HSBC and BBVA, according to Bloomberg data.
"When liberty is taken away by force it can be restored by force. When it is relinquished voluntarily by default it can never be recovered." - Dorothy Thompson