Following the political and economic developments of the last months and the tension in the relations between Greece and its creditors, it came as no surprise that the stress tests performed by ECB on the four Greek ‘systemic’ banks in September and October showed, once again, that a significant capital injection was necessary. The total capital shortfall, including in the adverse scenario, for all banks, namely Alpha, Eurobank, National and Piraeus came to more than 14 billion Euros.
Immediately after the results of the exercise were announced, Greece proceeded to amend its banking regulations so as to incorporate certain rules that will apply to the new round of ‘preventive’ recapitalisation, as well as enhance the governance structure of the four banking groups. This occurred via a new law and an Act of the Ministerial Council, namely Law 4340/2015 and Act of the Ministerial Council 36/2.11.2015, which were both published in the Government Gazette and are already in force.
The law introduced changes to the previous legislation on the governance of the Hellenic Financial Stability Fund, the arm of the government which implements state participation in credit institutions requiring financial assistance. It sets forth the conditions for granting capital assistance for the purpose of preventive recapitalisation and the procedure for doing that (new articles 6, 6A, 6B and 7 of the law 3864/2010 on the HFSF). And sets new rules on deferred tax credits (article 27A) which will apply from the fiscal year 2016 onwards.
Act nr. 36 sets forth the framework for the HFSF subscribing to conditional convertible bond issues of the banks and the basic terms of such bonds, such as interest rate (8%), conversion events (if CET1 falls below 7% and if two consecutive interest payments are missed) and transferability (possible, but only following a double consent of the issuer and the supervisory authority). It should be noted that such bonds have no specific term, are always redeemable and the holders have a right of conversion to common shares – at 116% of par – on their 7th anniversary.
This note does not purport to be an exhaustive presentation of the new provisions. However, we would like to draw your attention to certain interesting points.
First, it should be noted that banks will be called to issue to private investors capital amounting to at least the shortfall attributed to the AQR (‘asset quality review’), while the additional – ‘adverse scenario’ – shortfall may be covered through the participation of the Greek state/the HFSF, by a combination of 75% convertible bonds and 25% common voting shares. Given that bonds carry a substantial interest rate, banks have a clear incentive to maximise private investor participation and even avoid, if at all possible, to have the HFSF take part in the current round of capital raising. This will have the additional effect of diluting the existing participation of the Fund in the banks share capital, which ranges from 25% to 67%.
- To the extent public funds will be used, the current capital raising is expected to qualify as ‘an injection of own funds at prices and on terms that do not confer an advantage upon the institution’, in the sense of Art. 32 par. 3 (d) (cc) of the BRRD and the BRRD law 4335/2015,
- The price for the share capital increases will be determined by book-building exercises undertaken by each bank, but the HFSF must confirm via an independent financial advisor that these are up to internationally recognised best practices,
- New provisions have reduced the time periods required for certain corporate actions (convocation of shareholder meetings etc.), with the apparent intention to avoid the procedure spilling over into the new year, thus risking the full application of the bail-in tool of the BRRD law,
- New standards for bank governance under the supervision of the HFSF, have been established including a procedure for evaluating the members of the Board of Directors and of management committees of the credit institutions. Certain minimum requirements for top management positions, such as ‘international’ experience are expected to cause tensions with existing bank officials,
- It is clearly stipulated in the law, that any HFSF capital participation is not permitted to lead to the application of contractual provisions on default nor exercise of any such rights nor may it lead to similar results or be deemed in any way as a breach of the credit institution’s obligations under existing contractual arrangements,
- Finally, in the new law we find again the standard provision that the aim of the rules ‘… is the protection of a paramount public interest’, and they are binding and immediately effective and override any provision with other content. Wording which was seen first in the PSI legislation in 2012, but now has become more common in an effort to eradicate possible challenges to the constitutionality of the new legislation.
For additional information about the points covered above or indeed any other issue concerning the recapitalization of Greek banks, you may contact Michael Tsibris or Giannis Koumettis of our offices.