Draft plan on Greek bank recapitalisation terms

Local press unveiled today the (final) draft plan on Greek bank recapitalisation terms, which is due to be discussed and approved at a meeting with the Hellenic Bank Association scheduled today at 1pm. Same sources indicate that recap terms may be included in the bills to be tabled to parliament in the coming days, in case there is a political agreement on austerity package. We summarize below the key terms of bank recap, according to the latest press reports:

  • Banks’ EBA core Tier I target ratio is set at 9% (compared to the initial 9% by the end of September ’12 and 10% by the end of June ’13) and banks should be required to maintain their capital ratios at least at these level by YE’14 or YE’15.
  • Deferred tax asset (DTA) due to PSI will be recognized for regulatory purposes with deferred taxation prolonged from 5 years to 30 years. Taking also into account that corporate tax rate may be increased to 28% (from 20%), DTA recognition would potentially reduce the previously anticipated bank capital shortfall by €5-6bn. It is reminded that three of top-4 banks (namely Alpha Bank, Eurobank and Piraeus) have incorporated DTA (with a corporate tax rate of 20%) in their reported Q1’12 core Tier I ratios last May.
  • Banks’ proposal for guarantee of their GGB holdings by HFSF or the Greek state has been rejected, thus their GGBs will continue to be evaluated at market prices.
  • Common equity would account for (up to) 2/3 of capital requirements, while contingent convertible bonds (CoCos) would account for (up to) 1/3. This implies that the core Tier I target of 9% is actually split to 6% common equity and 3% CoCos. As an example, in case capital needs amount to €12bn, €8bn would be covered by the issue of common shares and €4bn via CoCos.
  • CoCos will be issued by HFSF and granted to banks ahead of the upcoming right issues. After five years, if they are not repurchased by banks, they will be converted to common shares. Banks may buyback CoCos within a five-year period, even during the first year, if their EBA core Tier I ratio exceeds the 9% threshold. Furthermore, CoCos will carry an initial annual coupon of 7% with a step up of 0.5pp per annum.
  • Private investors are required to cover at least 10% of the upcoming rights issues (to reach the 6% common equity target), while the remaining 90% will be covered by HFSF via common shares. If the 10% target is met, private shareholders will be granted 9 warrants for each share they acquire in the share capital increases.
  • Warrants may be exercised every six months at an exercise price equal to the issue price plus a small premium (1pp) per semester. As an example in case the issue price of capital increase stands at €1, private investors may exercise their warrants at €1.01 in the first semester, at €1.02 in the second semester etc. Assuming that all warrants are exercised within the specified period, private shareholders will actually repurchase HFSF participation in common shares.

Press reports indicate that the aforementioned bank recap terms have been agreed by all involved parties, i.e. the Greek government, the troika, regulatory authorities and top-4 banks. If approved, recap terms are broadly in line with market expectations and the remaining key pending issue involves the finalisation and disclosure of each bank’s capital shortfall to meet the 9% EBA core Tier I target. Note that key prerequisite for the clarification and launch of recap process is certainly the approval for the disbursement of the next tranche of €31.5bn, the bulk of which would be allocated for bank recap.

Note – November 13, 2012

There is an updated post with the key highlights of ministerial cabinet act on Greek bank recap terms.

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