Karatzas and Partners Law Firm

Management and Transfer of Non-Performing Looans (NPLS) under the New Regulatory Framework

By Nikos Fragos, Attorney at Law, LL.M. Partner at Karatzas & Partners Law Firm

 

Greek banks have passed successfully the European Central Bank’s stress tests in May 2018, yet are still burdened with record levels of non-performing loans in Europe. By the end of March 2018, the gross on-balance non-performing loans amounted to €92.3 billion, corresponding to 48.5% of the total gross loans of the Greek banking system at that date.

Broken down by segment, the NPL ratio was no less than 57.2, 43.9 and 49.6% for consumer, residential and business loans, respectively (source: Bank of Greece). There is no doubt that such large NPE overhang weighs materially on banks’ profitability and capital adequacy. Tackling the NPE problem remains therefore a catalyst for making banks again commercially functionable and in position to support the real economy. For the same reason Greek lenders are asked to reduce by the end of 2019 non-performing exposures by 37%, to €64.6 billion while non-performing loans shall fall 47% to €38.6 billion. To that direction a series of legal reforms were implemented with the aim to create an active secondary market for NPL loans.
The Greek NPL Law
A milestone towards developing an NPL secondary market has been the introduction of the Law 4354/2015, the so-called NPL Law. Initially intended to capture only non-performing loans, the NPL Law has in the meantime been expanded to cover the servicing and acquisition of all forms of bank credit receivables. The main pillar of the new regime is the ability of special purpose and licensed loan servicers to service bank credits and loans, a business model which until then remained a privilege of licensed credit institutions.

Entering the loan servicing market

Under the NPL Law, servicing loan portfolios is strictly a regulated business requiring the prior license by the Bank of Greece. Servicers shall have the form of a Greek société anonyme and their statutory business purpose shall exclusively be the management of bank loans and credits. Hence, and as a fundamental principle of the new regime, licensed servicers are not allowed to hold any kind of economic interest in the managed receivables. The restriction to pursue only the servicing of bank receivables limits equally their ability to invest in any other types of assets, unless strictly related to their ordinary business activities (e.g. small-scale capex). A further prudential supervision layer is the fit-and-proper assessment by the Bank of Greece on the shareholder and management structure of the servicer. For this purpose, extensive information has to be submitted to the Bank of Greece including on the identity of direct and indirect qualifying shareholders and ultimate beneficiary owners, the board of directors and top line management. Bank of Greece needs also to understand and assess the business plan and organization structure of the entity as well as the key loan management policies and methods to be pursued in servicing bank loan portfolios.
Irrespective of the above, Bank of Greece may request for any additional information that it considers important for the assessment of the application. Moreover, licensed servicers are required to show an initial share capital of EUR 100,000 to be contributed in cash with a corresponding cash balance available at least at the time of licensing. Bank of Greece shall complete its assessment within 2 months from the date that the filing is deemed complete (which in practice can be a protracted process lasting effectively from 4 to 8 months de- pending on the complexity of the filing and other circumstances). At the date hereof, 14 servicers have been successfully licensed by the Bank of Greece with various others waiting in the pipeline (source: Bank of Greece).
Through a recent amendment of the NPL Law it has also been clarified that licensed servicers fall within the definition of financial institutions. NPL Law licensed servicers are therefore now permitted to act also as servicers under the Greek Law 3156 on securitization of business receivables (the so-called Greek Securitization Law or GSL). Such amendment shall provide more flexibility in the structuring of portfolio transfer transactions which are implemented by co-application of the NPL and/or the GSL (see below).

The acquisition of loan portfolios
As implied above, the NPL Law draws a clear line between economic ownership and servicing of transferred loan portfolios. Acquisition of bank loans and credits is therefore reserved only to so-called acquisition companies. The latter shall be in the form of a société anonyme with a registered seat in Greece, in any other EEA member state or any third country which is not deemed as a tax privileged jurisdiction. Hence, such entities do not need to be regulated or have a special business objective so that ultimately acquisition companies are not subject to any material limitations from a legal or regulatory standpoint. That said, in order for acquisition entities to be able to invest in portfolios, the NPL Law requires that, upon transfer of legal title, a servicing agreement is executed between the acquirer of the portfolio and a licensed servicer under the Greek NPL Law. Accordingly, all rights and powers deriving from the transferred receivables are exercised exclusively in the name and behalf of the acquirer through the licensed servicer.

NPL work-out related reforms

The Greek NPL Law set the framework for servicers and counterparties in loan sale transactions to interact and create a secondary market around bank loan assets. However, such market would not be attractive without a series of interventions at the level of work-out and management of non-performing loans. Indeed, recent reforms have significantly im- proved the legal environment for NPL resolution, including through:
Reforms of private and commercial insolvency framework Law 4549/2018 introduced important changes in the Greek private insolvency rules (mainly under Law 3869/2010). Their main focus has been to prevent the abuse of available legal protections by strategic defaulters. For example, debtors that apply for private insolvency are now obliged to withdraw from bank secrecy protection for a period of 5 years prior to the filing and submit a solemn declaration that they are not eligible for commercial bankruptcy. By this way the competent court can verify the existence of any business income whether the private debtor qualifies as a business entity seeking abusively protection under private insolvency rules. Material changes occurred also in the context of commercial insolvency law. Under Law 4446/2016 and Presidential Decree 133/2016, starting from 1.1.2017, the role of bankruptcy administrator can only be assumed by individuals that have successfully passed the examinations required for the reception of Insolvency Administration License and have at least 5 years of working experience as lawyers, statutory auditors or tax advisors. Moreover, through amending Law 4512/2018, all secured claims created after the 17th of January 2018, shall have priority over any kind of general privilege claims (e.g. medical and funeral expenses etc.) but not over any claims under debtor-in-possession funding arrangements.

Introduction of a new out of court workout scheme

The so-called Out of Court Work-out Law (OCW) was introduced on May 2017 and established a framework for out-of-court negotiations among distressed businesses, public creditors, banks and other creditors. By virtue of Law 4469/2017, as amended by Law 4549/2018, any individual business person, who is subject to bankruptcy or legal person (except of financial institutions) who derives income from business can file an application for the initiation of the extrajudicial debt settlement in the IT platform of the Special Secretariat for Private Debt Management until the 31st of December 2018. The main condition for inclusion under such scheme is that the debtor is in payment default for at least 90 days or had financial debt which has been rescheduled after 1.7.2016 or debt towards tax authorities, social security organizations or other public law entities (with a series of other qualitative and quantitative conditions applying accordingly). Within 2 business days from filing a mediator is appointed by the Special Secretariat for Private Debt Management. Following such appointment and subject to certain formalities, a debt restructuring proposal can be reached between the debtor and the majority of 3/5 of the total claims of participating creditors, which shall include 2/5 of the secured claims. The creditors and the debtor may freely decide on the content of the restructuring agreement provided that certain mandatory rules are observed.

Electronic auctions

Furthermore, by virtue of Law 4512/2018, as from 21.2.2018 all enforcement auctions are conducted solely via the electronic platform which is managed by the competent Greek Notaries Association. Any candidate bidder shall sign up with or without Greek VAT Number in the platform and request to participate without any physical presence. Most importantly, e-auctions shall take place no later than 7 months after the day of termination of the asset seizure. A pre-condition for the e-auction is the publication of a notice issued by the notary public in the website of electronic auctions. Upon completion of the bidding process the auction officer shall draw up the final report awarding the auctioned asset to the successful bidder. In the event that there is no successful bidder the e-auction procedure can be repeated within a period of 40 days.

Structuring and closing the NPL portfolio transfer

The recent legal developments and increased pressure on Greek banks to clean up their balance sheets have ultimately opened the way to material transaction activity. By the end of H1
2018 almost all Greek systemic banks have initiated or completed the sale of an NPL portfolio. The initial focus has been on retail unsecured loans, while the more challenging and complex secured corporate loan books are attracting now increasingly the attention of international investors. More specifically, on the retail space, Eurobank completed on 13 November 2017 the sale of €1,5 billion nominal value to Intrum Hellas DAC, National Bank S.A. completed in May 2018 the sale of €2,0 billion nominal value to CarVal Investors & Intrum, Alpha Bank completed on 23 March 2018 the sale of €3,7 billion nominal value to B2 Capital Holdings. Regarding the secure corporate portfolios, Piraeus Bank announced on May 2018 the sale of loans with €1,950 million nominal value to Bain Capital while both Alpha Bank, Eurobank and National Bank of Greece are currently in process of selling similar secured portfolios to international investors.
The commercial process of agreeing and completing an NPL sale has allowed counterparties to explore various appropriate structures for the transfer of offered loan assets. A key consideration in designing the transaction is whether such transfer will take place in accordance with the Greek NPL Law or the Greek Securitization Law or a combination of both above regimes. For retail unsecured loans there has been a clear preference for structuring such sales solely under the Greek NPL Law. Hence, both the transfer of the loan receivables and ancillary rights as well as the post-closing management of the portfolio are made subject to the Greek NPL with the involvement of a licensed servicer under the same law. For secured corporate portfolios, the market has so far followed a slightly different approach. As provided explicitly under the NPL Law, the application of the latter is independent and without prejudice to the application of the GSL. Based on such wording certain secured NPL sale transactions have been structured predominantly as securitizations under the GSL. At the same time, and as an add-on to the structure, licensed servicers under the NPL Law assume the role of servicing the transferred portfolio under the NPL Law while co-performing the function of the GSL-servicer (as required by the latter law). In any scenario, a legal due diligence allows investors to obtain visibility on different types of transferability provisions in the loan agreements and any related contractual provisions. The same due diligence exercise is useful to identify further contractual risks relating to the validity and enforceability of the receivables and their collateral.

Under both the GSL and NPL law the sale process results into the true-sale transfer of the bank loan receivables included in the portfolio perimeter (whether existing, future or conditional
receivables) and any formative or ancillary rights, such as guarantees, letters of credit, prenotations of mortgages, mortgages, pledges and financial collateral rights under Greek Law
3301/2004 and including all amounts of interest, fees and costs payable by the debtor in connection with a transferred loan asset. The above claims may derive from any loan or credit agreement, whether in the form of a bilateral loan or a corporate bond loan (syndicated or not) or a mutual revolving account or any derivative/hedging agreement, which is part of the portfolio. In addition, the purchaser shall acquire any special rights in respect of an asset, such as all special privileges of the transferor being a credit institution relating to the enforcement of claims etc. On the other hand, the transfer shall not include any obligations or liabilities of whatever form of the bank to any third parties that relate to the portfolio (including for example any obligations for committed and non-utilized loan amounts or other monetary or non-monetary liabilities towards the borrowers). In other words, both under the GSL and the GRL, the transfer shall exclusively relate to assets and not liabilities or even the complete contractual loan relationship which is the source of the transferred receivables. That said and as per the no-worse-off principle, the receivables under the Portfolio are transferred to the purchaser on their existing condition and without any procedural or substantive legal alteration (‘as-is’).
Finally, under both the NPL Law and GSL the perfection of the transfer is subject to certain registration and borrower notification formalities. Together with notification requirements under the GDPR, the above pre-closing and post-closing formalities are a key contractual and operational parameter of the successful completion of the portfolio transfer. The same applies in relation to any formalities and registrations to take place vis-à-vis the various land and pledge registries in case of secured loan portfolios.

Outlook

The current dynamic of the NPL market promises indeed substantial activity in the months to come. During such period the focus will inevitably shift from the completion of sale transactions to the real work-out of the various exposures. Licensed servicers, stepping into the shoes of divesting Greek banks, will have then to use maximum resources and test the limits of all available legislative tools so as to recover value for their client investors in both retail and secured assets. To that end, real life servicing experience will require lawmakers and Greek courts to ultimately revisit, interpret and adjust the NPL-related rules to the needs of the new environment and involved stakeholders.