Increasing investor appetite set to bring Greece one step closer

• 84% of investors highlight Greece as one of their top two target markets in Southern Europe for investing in non-performing loans
• Three quarters of Greek financial institutions surveyed state that it is very likely they will bring a non-performing loan portfolio to market in the next 12 months
• 90% of investors confirm they are likely to consider Greek NPL transactions in the next 12 months

With Greece having the largest non-performing loan ('NPL') ratio in the Eurozone, the lack of progress made in developing an active market in NPL resolution may be about to turn a corner according to a new research report by international law firm Ashurst.

The report, Greek NPL Momentum Builds, compiled the views of senior executives about the experiences and outlook for the Greek NPL market.

Mark Edwards, head of Ashurst's NPL resolution practice, said that the combination of European interest rates remaining at historic sustained lows and deep pools of investor capital available to be deployed across Europe is causing special situations investors to look to new markets for opportunity. A widely held belief that the Greek economy is showing signs of recovery, current low asset valuations and recent reforms creating the potential for an effective secondary debt market are all contributing to a new interest in the country for investors.

"Greece stands out as the target investment country for the next 12 months, with Italy coming in second at just over 50% and Cyprus, Spain and Portugal some way behind. Investor enthusiasm in Greece is underpinned by an understanding of the continued challenges in that market and 95% of investors see a realistic exit timeframe as between 7 and 10 years with 80% of investors expecting a rate of return that is more than 10% but less than 15%."

The research has shown that 100% of the systemic banks in Greece regard work outs handled internally as their preferred strategy for NPL reduction despite experience across other European NPL markets demonstrating the limitations of this approach. Loan sales and synthetic transfers were ranked second and third respectively.

Hospitality-related loans, were, unsurprisingly singled out as the asset class of most interest to investors, with 90% of respondents citing it as one of their top two choices for investment, followed by commercial real estate backed loans (50%). On the other hand, from a seller's perspective, large commercial credits are the primary focus of the Greek banks, with 50% regarding such assets as one of their biggest NPL challenges.

Despite a range of legal reforms which will help create an effective NPL market having now largely been implemented, Greek banks, investors and local servicers still see obstacles to an active Greek NPL market:

• 55% cited the mismatch of pricing expectations between sellers and investors as a critical impediment
• 50% cited the lengthy and cumbersome legal enforcement framework
• Over a third noted the potential criminal liability for bank officers approving consensual restructurings

Restructuring and special situations partner, Olga Galazoula, commented:

"A combination of local legal constraints, insufficient loss provisioning and wider macro-economic uncertainty has, to date, contributed to slower restructuring and NPL resolution activity levels compared to certain Southern European countries with similar NPL challenges. It now seems that the tide is turning and what we are seeing from clients active on the ground is a greater degree of realisation and sense of urgency to tackle the problem head on."

With Greece currently holding the attention of the world's NPL investor community, in order to capitalise on this and secure its status as a key NPL investment market, the report stressed the importance of the following factors:

• Sellers need quickly to establish themselves as trusted transaction counterparties
• Data quality needs to be a primary focus for sellers bringing assets to market
• Sellers need to demonstrate to investors a clear route to transaction execution
• Close management of regulatory issues and liaison with regulators will be paramount
• Investors that are unfamiliar with Greece will need guidance on some very Greek-specific legal considerations

Banking partner, Mark Vickers, said that successfully executing a series of formative transactions over the next 12 months is key to driving investor community confidence.

"There is a real expectation in the market that Greece is on the cusp of potentially transformational NPL transactions being implemented. The market needs one or two large pathfinders deals. When these get done, meaningful momentum will quickly build.

The macro environment for investing in Europe plays well to Greece's advantage with some attractive relative value opportunities compared to elsewhere. Resolution of the banks' legacy NPL issues will also provide a welcome stimulus for Greek sovereign debt and facilitate wider access to the international capital markets. Put simply, the time for the market to start moving is now."