A new era: the recent history of Greek’s leveraged finance landscape
Kely Pesketzi of PwC Legal Greece reports on Greece’s economic rebound and the solidifying of its banking and finance systems through new legal provisions and tools
A snapshot of international financial markets anywhere between 2022 and the first half of 2023 may look quite different to what was going on in Greece during the same period. History has shown that there is a time lag between international developments and their domestic repercussions, which might explain why, contrary to most key financial jurisdictions, 2022 was a year of exceptional economic and transactional performance for post-crisis Greece. This, in turn, places the discussion on leveraged finance activity and outlook in a different context, noting the small size of the Greek market and the back-to-back effects of Greek-specific and global developments during the last decade.
In 2022, foreign direct investment was the highest the country had seen in 20 years, while a growth rate of 5.9% had GDP exceeding pre-pandemic levels, and despite harmonised CPI averaged at 9.3%. Greek banks, having completed several massive non-performing loan (NPL) deleveraging transactions between 2019 and 2022, launched several liquidity enhancement initiatives (such as MREL-driven issuances and synthetic securitisations) and, with healthier balance-sheets in place and transformational strategies ready, channelled credit to the Greek market at an annual growth rate of 8.3% in 2022 compared to 5.7% in 2021. This strong rebound in new bank loans was mainly driven by large corporate borrowers, with the relevant average monthly flow of loans more than doubling compared to 2021; Recovery and Resilience Fund (RRF) and international finance institutions -backed arrangements had a significant share in these financings. Concurrently, M&A activity boomed: 94 transactions of approximately €10.4 billion in value closed during the previous year, the highest ever recorded (both in terms of value and number). The vast majority of these (in terms of value) involved foreign investors, including private equity firms.
Data suggests that these metrics continued to improve within the first semester of 2023 but with lesser pace than before. At the time of writing, Greece just regained its investment grade rating from DBRS and scored a double upgrade from Moody’s, which may soon prove critical to containing inflowing adverse financial impacts.
Against this background, it is no wonder that global economic downturns and geopolitical factors have yet to translate into concrete documentary or structuring consequences in the domestic financing market.
Borrowing, lending and investing
Direct lending is the prevailing trend as the main sources of funding remain at the hands of the four Greek systemic banks, with two banking entities emerging to form a fifth, non-systemic, banking pillar. Local bank lending revolves around a similar documentation approach and structural concepts, aiming to bridge standard Loan Market Association (LMA) provisions with some sponsor support or other risk mitigation mechanisms, allowing margins to be somewhat more competitive than expected of the domestic market. Going forward, it would be reasonable to expect some containment in margins, stricter financial covenants and maintenance of robust hedging arrangements though prepayment clauses, and break cost-type arrangements have not materially deviated the local norms - yet.
Greek banks, keen on channeling excess liquidity in the market, have been particularly active in acquisition financing, underpinned by the robust M&A activity described above; the four large players supported deals across industries in different sizes and structures. Interestingly, local lending institutions have attracted and granted funding to foreign investors and/or private equity funds, not only in large scale corporate M&As but even in sectors which were originally financed by international players, such as NPL portfolio acquisition.
A significant domestic debt capital market (DCM) trend spanned from early 2021 to summer 2022 with 11 retail offerings for bonds trading on the Athens Stock Exchange. These offerings were launched by high performers, major Greek corporates with a solid domestic retail investor base, in the less costly listing venue (ATHEX) and a generally familiar, therefore comfortable, covenant package.
On the distressed side of the market, the landscape differs significantly as it falls within the broader NPL universe, being one of the largest markets in Europe. Distressed exposures shifted from the banks to investors and their servicers during the last 2-3 years so work-outs are still in progress concurrently with secondary sale transactions. Although the latter can generate acquisition financing transactions, single ticket work-out deals do not typically have the scale to create trends in restructuring or amend and extend activity. In any case this activity has so far been driven by the pressure to fulfil the business plans backing the securitisations of the relevant portfolios.
An acceleration in both the regulator’s initiatives and servicers’ operational and capital readiness is expected, for loan servicers (financial institutions) to start engaging in refinancing activity. The existing framework, which includes relevant provisions that have not yet been used, is expected to be further elaborated and enacted concurrently with the transposition in Greece of the EU Directive on Credit Servicers and Credit Purchasers (EU/2021/2167). This is in line with recent references by the Greek prime minister in annual governmental announcements on September 16 2023 that a framework will be designed to enable non-banking vehicles to engage in lending activity.
In parallel, the four systemic banks continue their efforts towards a joint platform to resolve and/or dispose of common exposures to medium and large corporate borrowers. Meanwhile the Hercules scheme, the Greek state guarantee arrangement for the senior tranches of non-performing bank loan securitisations (HAPS), is said to relaunch.
Market and economic forces
Data suggests that enhanced consumer spending has significantly contributed to the growth rates discussed herein; inversely, inflation, high interest rates and supply chain challenges are expected to continue to put pressure on Greek consumer spending, thus potentially slowing down business and financial activity. Further, there is no clear visibility of the potential economic repercussions from a series of natural disasters that occurred this summer in areas of core significance for Greece’s primary production sector. Also, in a market heavily dependent on local banks, the recent European Central Bank priorities and guidelines on leveraged finance, coupled with the trauma of a decade-long financial crisis, may enhance conservativism in lending activity and/or protract negotiations on financial terms.
The good financial performance of the local economy, attested by the investment grade course of the country, will inevitably mean that the domestic market will be affected by global downturns more directly compared to peer European jurisdictions – for better or worse. However, Greece managed to attract and retain interest of major investors, investment banks, private equity funds and international conglomerates during the last decade, as investors have been actively looking into NPL and other opportunities and following legal and industry developments closely. The familiarity with the market in a time of Greek-specific turbulence may translate into trust and controlled risk-taking in a globally challenging time.
On that basis, M&A activity looks set to continue in the next year or so, with the technology, fintech, energy and real estate industries underpinning the relevant fund-raising transactions. Alongside the direct acquisition finance lending, the trend of open-ended use of proceeds (working capital and refinancing of existing indebtedness) should continue even when backing acquisition activities. Bond issuances and general DCM/equity capital markets are by default in pole position to boom with the improved sovereign lending at hand.
Going forward, data quality, robust modeling and well-worked projections will be the cornerstone of negotiations and go-no-go decisions at both ends of the table. Customisation and audits of financial covenants will be most relevant.
Parties should also assess proposed documentation carefully, with the newly shaped environment in mind, considering that Greece is a jurisdiction where parties often contract based on English law concepts and documentation structure but apply Greek, i.e., continental, law and jurisdictional fora.
Greek law provisions on intragroup loans and guarantees, financial assistance and buy-back of securities (be it shares or bonds) will need to be put on the table early on when contemplating and structuring any type of liability management exercise and/or large-scale refinancing arrangement. This is together with the usual tax sensitivities around stamp duty and interest withholding as well as accounting and/or valuation requirements, to the extent relevant.
When discussing financing structures, there are three key alternatives in the market, all having idiosyncratic local traits:
Bond loans issued by Greek corporations (société anonyme companies) pursuant to specific legal framework (Greek law 4548/2018). This is a multiuse, tax efficient legal tool designed (and revamped in 2018) to serve different types of deals, from bilateral (even intragroup) lending to public offerings of listed bonds. It involves standard LMA clauses of the relevant type of financing combined with standard clauses on the issuance (in paper or electronic form) and subscription of notes pursuant to the specific type of corporate resolutions of the issuer. It is greatly used by Greek banks but also allows for non-banking lenders to finance Greek corporates on the basis of similar privileges and exemptions, including by way of releasing bond issuances from interest rate restrictions imposed by usury laws on non-banking loans.
Uncommitted revolving credit accounts or what is called in Greece “allilochreos”. The "allilochreos" is an old, Greek specific, and massively used hybrid bank credit product, consisting of a credit contract and an account contract. It was established through the Greek civil code as a joint account between two merchant entities, where both parties are entitled to use the account (drawing and depositing funds) then periodically net-off the account to assert a positive or negative balance in favour of either party. This concept was adapted by the Greek banks to create a credit product operating as a revolving credit line, where the bank disburses monies into the bank account and the borrower can draw and credit back the drawn amount. The bank then periodically "closes" the account (i.e., runs the net-off exercise) to assert credit or debit balance. Documentation for this product is standard and seldom negotiated, despite the sometimes-archaic language, maximalist lenders’ discretions and open-ended covenants. It is often used as a bridge facility tool, to cover funding needs during the period it takes to negotiate and close the medium or long-term financing.
Asset-backed transactions launched in the last few years were nearly exclusively the NPL securitisations of the Greek systemic banks (including under the HAPS scheme) and their synthetic securitisations between 2021 and 2022. The market waits for volumes to accumulate scale, to reboot standard commercial mortgage-backed securities and residential mortgage-backed securities primary deals, or other types of loan receivable securitisations (for example ESG, leasing receivables). The market saw few non-banking securitisations in the field of auto leases and energy consumer receivables during the previous years. But a well-established factoring market, mostly driven by regulated affiliates of the Greek banks, may offer medium or small players similar liquidity benefits with less of the “fear of the unknown” sentiment that a multi-party international transaction with heavy documentation may convey.
Current market discussions are all about ESG and digital instruments, as well as reperforming loans and their return to the healthy credit system.
On ESG, the deals track record attests the gap between the market’s large players (banks and listed companies) and medium/smaller sized businesses. The large players have issued green or sustainability-linked instruments, are fiercely preparing for non-financial disclosures and regulatory compliance, drawn policies and sought best practices in sustainability, governance and broader ESG, and often pursued certifications and opportunities to formalise transformational initiatives in these topics.
Once off the large cap universe though, the presumed hustle of attaining ESG goals outweighs the benefit of the slightly lower cost of funding that it brings. However, with the RRF funds in sight and the energy transition turbulence, the challenge to change to secure funding may soon transform into opportunity, especially in view of potential incentives launched by the government to boost the residential real estate market and energy efficiency. Besides, an impending issue of a green sovereign bond is long reported in market news, which may further popularise the transition.
As the local blockchain ecosystem is still in its formative stages, Greece is taking an observational approach towards the activities relating to crypto assets and has not yet produced elaborate rules or a comprehensive legal framework. Existing rules are fragmented across diverse legal texts such as the Greek anti-money laundering law and Greek law 4961/2022 on emerging technologies, which makes references to blockchain and DLT technology as a first legislative attempt to address regulatory issues relating to contracts based on blockchain technology.
On the transactional front, the trend should evolve more around TMT and fintech M&A and acquisition finance deals rather than digital bonds. The fact remains that attracting the big technology players is a governmental strategic priority (with Microsoft and Amazon working on investments in the country). A number of large-scale TMT (e.g. logistics centres) or fintech deals (notably e-payment platforms and merchant acquiring operations) show the market’s potential.
Back in the days of severe disruption in Greek financial markets, a common description of the sovereign troubles was of a lagging child’s illness that failed to be timely addressed. As with all illnesses, disease creates immunisation. Greece designed bank resolution and restructuring legislation well before the bank recovery and resolution directive, and applied most of these tools to address the failing of small and medium sized banks without disrupting the stability of the banking system and protect deposits.
Today the local legislators and regulators, as well as the credit institutions themselves, do follow European legislative initiatives and comply with centralised instructions from EU competent bodies (most recently on deposit guarantee funds and schemes). But in reality, the discussed tools and legal provisions truly help to solidify the financing system and the Greek banks, both the systemic and the new players, against risks similar to those they already overcame in the past.