ATHENS – Aiming to shake off bad loans and raise capital, Greece’s third-largest lender, Eurobank, will scoop up real-estate company Grivalia for some 780 million euros ($880.09 million) and hopes to complete the merger by April, 2019.
The Wall Street Journal and Greek newspapers Kathimerini and Naftemporiki said the surprise announcement was part of a plan to cut Eurobank’s bad loans by 15 percent as it is in some cases not working with customers who can’t pay because of austerity and demanding 100 percent repayment without offering restructuring or settlements.
The move will remove seven billion euros ($7.9 billion) of Non-performing Loans (NPEs) from the bank’s balance sheet with a single transaction, with media reports pointing to the creation of a Special Purpose Vehicle (SPV) to receive the tranche.
The deal gives Fairfax Financial Holdings a 32.9% stake in the merged entity. The Canada-based insurer currently holds an 18.2% stake in Eurobank, Greece’s third-largest lender by assets, and a 51.4% stake in Grivalia, said The Journal.
Greece’s state bailout fund for banks’ share in Eurobank will decrease after the deal to 1.4% from 2.4% the report added. The fund was set up in 2010 and gave Greek banks three bailouts of some 50 billion euros ($56.42 billion) from three international rescue packages of 326 billion euros ($367.83 billion) but it wasn’t enough because customers buried by big pay cuts, tax hikes, slashed pensions and worker firings couldn’t pay.
The move is a bit of gamble for Fairfax’s CEO Prem Watsa who said since 2014 he’s lost $600 million on Eurobank, the financial news agency Bloomberg reported and as the bank’s shares have fallen 31 percent in the last year as it’s been unable to shake off enough bad loans.
“We’re long term,” Watsa, 68, told Bloomberg. “We bought shares when they recapitalized, we’re putting in more money through Grivalia. We think this is a very good bank.”
Fairfax has been investing money in Greece since 2010, but Watsa’s optimism has been wrong and costly with Fairfax losing some 30 percent of its $1.42 billion in investments, the company’s annual report showed.
Watsa said he expects Greece’s economy to grow between 2% and 3% starting next year, and growth could surpass that expectation. “They’ve been in a depression,” he told The Journal, of Greece’s economy. “On the way up and out, economic growth can be significant.”
Fokion Karavias, Eurobank’s Chief Executive, and George Chryssikos, Grivalia’s CEO, came up with the acquisition plan and presented it to Fairfax in September, Watsa said. “The opportunity is very significant,” he said. “We liked it.”
Karavias will be the combined bank’s CEO, while Chryssikos will become Non-Executive Vice Chairman of the board. Watsa said the two will work together on the merged bank’s plans, including any expansion.
After the merger, Eurobank will proceed with plans to create the bad bank, where it would transfer the “worst of the total sour loans,” an official from the bank said which is expected to reduce the bank’s capital by 1.1 billion-1.4 billion euros ($1.24-$1.58 billion), which will be covered by the capital boost from the merger as well as a strategic investor Eurobank intends to seek for its loan servicer, Eurobank Financial Planning Services, the reports said.
The Bank of Greece and the government’s bailout fund for banks are working on two separate plans to finance a bad bank with Prime Minister and Radical Left SYRIZA leader Alexis Tsipras anxious that failure to resolve the bad loans could derail what he said is a coming recovery after the Aug. 20 end of the bailouts and as he wants to get the country back into the markets.
Eurobank – one of four systemic banks in the country – said the merger “…creates the best capitalized bank in Greece, with total capital ratio at 19 percent,” and would further de-risk its balance sheet by quicker shedding of bad loans.
Karavias said that, “having dealt with the issue of NPEs, the bank will be able to focus on its return to growth and the support of economic activity in Greece and Southeastern Europe.”
Grivalia Properties, the 20 percent Eurobank-owned affiliate formerly known as Eurobank Properties, is one of the Greek stock market’s blue chips and will be delisted upon the merger’s completion, said Kathimerini.
The plan provides for the absorption of Grivalia by Eurobank and the transfer of all existing assets and obligations of the merged group – including deferred tax assets but not the SPV – to a new bank subsidiary, the new Eurobank to be transformed into a holdings company, with the “good” bank (the new Eurobank) and the SPV under its umbrella.
The new lender will have total capital of some 5.3 billion euros ($5.98 billion,) of which 900 million euros ($1.015 billion) will come from Grivalia.