Bank Assets Management Company (BAMC)

The BAMC was created as part of the ZUKSB law, which was meant to provide for asset purchases as well as bank capital injections (Bancni vestnik 63[11). Slovenia coordinated the passage of the ZUKSB with the ZSHD law, which set up a new holding company for state-owned assets.^FThe passage of these two laws nearly coincided with the €100 million December 20, 2012, government capital injection for NKBM. This injection sought to bring NKBM into compliance with EBA recommendations on solvency levels after the bank failed to raise enough capital from the private sector and took the form of contingent convertible instruments (CoCos) (EC DG COMP 2013a). In response to a challenge from the parliamentary opposition, the constitutional court concluded that the ZUKSB law was constitutional because Slovenia “will have no choice but to request for international financial assistance” if the law were not passed. The troika, if it provided such assistance, would then monitor Slovenia’s compliance, and this would “infringe upon Slovenia’s sovereignty which is a constitutional principle” (Bardutzky 2016).

The BAMC’s legislation allowed it to conduct up to €1 billion worth of capital injections (Slovene Press Agency 2012-09-20). The BAMC would fund these injections from the same €4 billion in state-guaranteed borrowing as its asset transfers (Slovene Press Agency 2012-09-20; ECB 2012). The newly formed Slovenian government decided in May 2013 not to allow the BAMC to exercise this power. While the government did not state its reasoning publicly, former non-executive director of the BAMC Lars Nygaard offered a potential explanation. Recapitalization would leave the BAMC as a “major owner of the big banks on top of all other assets transferred to it, including some big corporates,” which “would have been too much, politically if not economically” (Bancni vestnik 63[11]).

The BAMC’s domestic legal authority came from the Act Defining the Measures of the Republic of Slovenia to Strengthen Bank Stability (“ZUKSB”), which the government passed in October 2012. ZUKSB created a process for banks to apply to participate in the BAMC (Bancni vestnik 63[11]).

As the BAMC entailed state aid, its operations needed to be authorized by the European Commission’s Directorate-General for Competition (EC DG Comp). Even in the absence of a troika program, the EC retained the authority to approve or disapprove all government decisions on asset transfers and capital injections under European rules governing state aid (Bancni vestnik 63[11]; FinSAC 2016).

The EC DG Comp refused to approve asset transfers and capital injections until the Slovenian government (as well as the Bank of Slovenia) coordinated with the EU AQR/ST (EIU 2013-10-07; IMF 2012; BAMC 2014). The EC DG Comp also excluded the BAMC from its asset selection and valuation process, going as far as having the EC DG Comp’s “experts doing independent valuations of all assets suggested by the banks and the supervisor (the Bank of Slovenia) for transfer to BAMC” (Bancni vestnik 63[11]). This delayed the first asset transfers until the end of 2013 (IMF 2012; BAMC 2014). This need for EC DG Comp approvals also delayed asset transfers from Abanka until late 2014 (Slovenian Press Agency 2015-10-06; BAMC 2015; EC DG Comp 2014).

The ZUKSB gave the BAMC and the government a number of broad powers over banks. The most significant of these was the power to establish a Bank Stability Fund, which would then conduct capital injections. The BAMC could use its assets to acquire bank shares and other instruments counted in a bank’s capital, but only “if financial stability in the Republic of Slovenia cannot be achieved by other measures or in a more economical manner” (Unofficial ZUKSB translation 2015). The ZUKSB initially devoted up to €1 billion of the €4 billion in state guaranteed borrowing by the BAMC for such capital injections (Slovene Press Agency 2012-09-20). The Slovenian government could heavily circumscribe the use of this power, though the capital injection powers were never used and appear to have been taken away from the organization in 2015 (BAMC 2014). In December 2015, an amendment to the ZUKSB appeared to take away any reference to how much the government was willing to guarantee BAMC lending that would be used for recapitalizing banks (Slovene Press Agency 2012-09-20; Havrylchyk 2013; EC Staff 2013-04-10; Unofficial ZUKSB translation 2015). By this point, the Slovenian government had already used other maneuvers to recapitalize its banks (Sila 2015; BoS 2015).

The law also allowed the BAMC to order a participating bank to convert bad debt into equity in a company before transferring the exposure. The law also allowed the government to control bank dividend policy, operating costs, and staff remuneration (Havrylchyk 2013). However, the BAMC initially lacked a number of powers possessed by contemporary AMCs in Ireland and Spain, which included the ability to provide loans to borrowers and to ensure the AMC acquired a majority position in borrowers (BoS 2014; Sila 2015).

The government largely solved these problems with the previously mentioned December 2015 amendments to the ZUKSB. These amendments gave the BAMC a number of new powers and responsibilities related to restructuring debtors (BAMC Strategy 2016; IMF 2017). For example, it extended the period in which the BAMC was allowed to have voting rights in a participating borrower if the BAMC would have to dispose of the related assets from two to five years (Unofficial ZUKSB translation 2015).

The BAMC was not fully fleshed out when the legislature passed the ZUKSB. The BAMC and Slovenia’s strategy for using the BAMC evolved over time, sometimes dramatically changing with the economic and political situation (Bancni vestnik 63[11]; ENP Newswire 2013). Slovenia went through four ruling coalitions and prime ministers between early 2012 and late 2014. The ZUKSB did not envision the BAMC playing a role in activities like facilitating bank mergers and resolution, though the government eventually asked the BAMC to perform these activities in late 2015 with the Abanka-Bank Celje merger and throughout 2016 when the BAMC absorbed Factor Banka and Probanka (the ZUKSB-A saw the BAMC conducting some of these activities). This required BAMC staff to be extremely flexible (BAMC 2015; Bancni vestnik 63[11]; Havrylchyk 2013; BAMC Strategy 2016).

The BAMC was set up to be a comprehensive restructuring agency for the Slovenian banking sector, performing capital injections, asset purchases, and corporate restructuring (EC Staff 2013-04-10). However, the BAMC was predominantly focused on the asset-purchase function. Within the ambit of its asset purchase operations, the BAMC aimed to minimize the taxpayers’ burden while repaying BAMC bondholders. The BAMC would do this by maximizing the value of its assets (BAMC 2014; BAMC 2014a). The government also intended to use the BAMC as a tool to eventually conduct restructurings throughout the Slovenian economy (Slovenia NRP 2013). The government understood that the BAMC’s operations could provide support for individual companies with promising business models though mechanisms like exchanging a company’s loan for an equity stake (BAMC Strategy 2016).

The government referred to the BAMC as a bad bank and had trouble getting the Slovenian public to understand what an AMC was. One early BAMC administrator attributed this lack of understanding to the intense debate surrounding the passage of the ZUKSB (Bancni vestnik 63[11]; Slovene Press Agency 2012n). The BAMC began its operations with a straightforward “From Bad to Good” communications policy that aimed to shift the media’s focus from anticipating the consequences of the BAMC’s actions to evaluating the BAMC’s performance (BAMC 2014).

This was unsuccessful at creating support for the BAMC among politicians and the media. The BAMC developed an adversarial relationship with the government and the Bank of Slovenia in the run-up to its asset transfers (BAMC Press Release 2014-10-30; Bancni vestnik 63[11], 101-112; BAMC Press Release 2014-12-18). Executives at the BAMC had an even less positive relationship with the press. They produced long and sometimes sarcastic statements that attempted to refute negative coverage (BAMC Press Release 2014-12-18a; BAMC Press Release 2015-07-13).

In response to the critical reports by the CPC and the Court of Auditors, the BAMC pursued an anti-corruption certification program from private anti-bribery and corruption certification agency ETHIC Intelligence in late March 2015 (BAMC PR 2015b).

The BAMC’s relationship with the government and press apparently became less strained once Nyberg and Månsson left the BAMC (Slovenian Press Agency 2018-07-05; Slovenian Press Agency 2015-10-06; Balogh 2018). The new management adopted a more generic communications strategy around 2016 (BAMC Strategy 2016), which revolved around five principles:

• supporting BAMC’s strategic goals by promoting understanding of the role of BAMC and benefits BAMC brings to the Republic of Slovenia and the taxpayers, in key audiences;
• obtaining the support of key audiences in implementation of measures;
• managing media relations, that will, as far as possible, support the achievement of BAMC’s objectives;
• ensuring the “one company one voice” communication effect; and
• changing BAMC’s communication from being reactive to being proactive (BAMC Stakeholder Strategies).

With this new strategy came a less blunt slogan: “Creating Good with Excellence” (BAMC 2018a).

The BAMC was organized as a publicly owned joint-stock company because of an interaction between the 2009 changes in Eurostat’s rules and the characteristics of Slovenia’s banking sector at the time. In 2009, as Ireland was developing its own AMC, Eurostat decided that “AMCs with less than 51 percent private ownership would not be classified as contingent liabilities” and would be immediately counted “against public debts and deficits.” While Ireland, and later Spain, found workarounds that allowed them to comply with this rule, the state-dominated structure of Slovenia’s banking sector made it virtually impossible to create an AMC with less-than-majority state ownership. The government thus had no choice but to structure the BAMC as a publicly owned AMC. Professors Gandrud and Hallerberg hypothesized that the Slovenian government had the BAMC acquire its assets at “large haircuts relative to those applied at AMCs in other EU countries” because it wanted to “partially offset the cost of public AMC ownership” by maximizing profits passed on to the government (Gandrud and Hallerberg 2016).

The BAMC had a “one-tier governance system,” in which the organization was governed by a Board of Directors containing four non-executive directors (appointed by the government) and three executive directors (appointed by the non-executive directors) (BAMC 2014). The OECD said that this structure “allows for greater influence of the single shareholder —the government—on operations” (Sila 2015). The CPC questioned the wisdom of this structure, arguing in late 2014 that “a two-tier governance system would contribute to reducing corruption and other risks which the company was exposed to in the course of its operations and warned about potential conflict[s] of interest” (BAMC 2015). Because the government was the sole shareholder, the BAMC’s “purchases and business plans are [were] approved by the Slovenian government” (IMF 2014).

In response to corruption allegations and management changes, the BAMC modified its governance system in late 2015 (BAMC PR 2015f; BAMC PR 2015H; BAMC Strategy 2016). From this point, the non-executive directors were restricted to having a supervisory (as opposed to a management) role within the organization. These modifications also shortened the mandate of board members appointed before the passage of the 2015 amendment to the ZUKSB to December 31, 2017, at the latest (BAMC Strategy 2016).

All members of the board were exempt from legislative limits on executive pay, which the BAMC’s creators thought would “sweeten the deal” (Slovene Press Agency 2012-09-20). Dovetailing with this explanation, the majority of its initial board was dominated by foreign experts “with links to the key European crisis management actors” (Piroska and Podvrsic 2019; IMF 2014).^FAs of July 31, 2014, there were three foreign non-executive directors, and there was one foreign executive director. The three non-executive directors included the former “President of the ECB Task Force for Crisis Management,” the leader of the IMF’s response to the Asian banking crisis of the late ’90s, and a member who served on the troika in Spain. The single foreign executive director happened to be the former CEO of Reverta, Latvia’s bad bank (BAMC 2014; Lehmann 2017). Former non-executive director of the BAMC Nyberg further elaborated on the BAMC’s focus on international expertise, reflecting that “Since the international credibility of the Slovenian banking sector was very low, the bank needed international consultancies in order to get the green light from Brussels” (The Slovenia Times 2014).

When the government modified the ZUKSB in late 2015, members of the board remained exempt from legislative limits on executive pay, but the government (as the sole shareholder) halved salaries on the board (The Slovenia Times 2015).

The BAMC also had a “performance-based remuneration system” for employees, though it was not the target of widespread public criticism, unlike the performance-based bonuses given to NAMA employees in Ireland (Balogh 2018).

It is not clear why the Slovenian government chose to limit its guarantees to this size.

The BAMC funded its asset purchases with government guaranteed bonds with two- and three-year terms, but gradually shifted its financing structure to “Exclusively amortizing low-cost debt” (Balogh 2018). (See Figure 6.) It is also not clear why the Slovenian government charged the BAMC a fee for guaranteeing its bonds, which ranged from 1.00% to 1.25% annually (BAMC 2014; BAMC 2019).

Figure 7: The BAMC gradually shifted the structure of its debt
Source: Balogh 2018, PDF Page 15.

In late 2013, the Bank of Slovenia described these three banks as those having unresolved measures requiring a capital increase and being in the process of having state aid approved (Bank of Slovenia 2013).

Determining whether a bank was eligible to participate in the BAMC involved two steps. First, the government’s Inter-Ministerial Committee had to establish “that the bank does not have, or will not have within the following 12 months, sufficient capital to meet capital adequacy requirements and, as a result, the stability of the financial system is threatened” (ECB 2013; Bancni vestnik 63[11]). Second, each bank had to submit a business plan to convince the government that the bank was adequately capitalized, that it had an adequate liquidity position, that the bank (as well as the bank’s equity holders) would share the costs of recapitalization during the restructuring,^FAs the BAMC ultimately never conducted recapitalizations, this was probably not relevant to the government (BAMC 2014). and that the bank would implement measures to “prevent or mitigate any possible distortion of competition” (ECB 2013). However, other banks did eventually participate in the BAMC. BAMC followed the same procedures in acquiring assets from Banka Celje (Sila 2015). It followed different procedures in acquiring assets from Probanka and Factor Banka. Probanka and Factor Banka first had some of their corporate assets acquired “in arm’s length transactions at negotiated prices”. The BAMC said that it acquired these assets to get enough leverage over a given debtor to execute its plans (Sila 2015; BAMC 2017). Later, the remaining assets of these two banks, which constituted a large number of small exposures, were merged into the BAMC (Balogh 2018). The Bank of Slovenia offered an explanation for the merger, stating that the Slovenian government “economically merited” from the transaction because the government was already the sole owner of all three parties. It elaborated that the merger would allow for “operational rationalization and, most importantly, […][allow] more time for disposing the assets of the acquired companies, consequently increasing the proceeds, and reducing the likelihood of a need” to prop up the two banks with any more capital (BAMC 2017).

The ZUKSB articulated the process for determining what the BAMC would eventually purchase (Uradni List 2012; Uradni List 2013). While the banks and the Bank of Slovenia prepared an application that would outline the assets the relevant bank wanted to sell, the Inter-Ministerial Committee was responsible for all decisions on what assets would be eligible under the ZUKSB (Nyberg 2014; Uradni List 2012). This committee has not released a methodology for determining which assets should be transferred. The ZUKSB said the Inter-Ministerial Committee would have eight members, all appointed by the Bank of Slovenia and the government (Havrylchyk 2013; Slovenian Press Agency 2019-11-04). However, the Inter-Ministerial Committee would contain members representing the Bank of Slovenia, the Ministry of Finance, the Ministry of Economic Development and Technology, and the Office of the Prime Minister. However, the EC DG Comp, in consultation with the ECB and EBA, ultimately decided which assets would be purchased (BAMC 2014; Bancni vestnik 63[11]; FAQ 2013). As the roots of Slovenia’s problems came from its corporate sector (IMF 2014a), the BAMC mostly acquired large complex corporate exposures from participating banks (Lehmann 2017).

The BAMC’s early management wanted two principles to guide the organization’s asset purchase process. First, it wanted to transfer a bank’s entire exposure to a borrower if the exposure contained both performing and non-performing loans. Second, if the BAMC took over a non-performing loan from a bank, it wanted the BAMC to acquire all of the other exposures (including performing ones) to that borrower from other banks. Management thought that this approach would make it easier to restructure the BAMC’s assets, thus making it easier to increase asset values (Nyberg 2014). However, poor coordination between the BAMC and the Bank of Slovenia meant that these principles were often not practiced, at least for the late 2013 asset transfers (Bancni vestnik 63[11]).

All assets would be paid for using government guaranteed bonds with two- and three-year terms issued by the BAMC (Balogh 2018).

The Slovenian government initially thought that “it is sensible to structure assets into groups, so that individual groups with regard to the characteristics of debtors or characteristics of assets which are considered as insurance present a homogenous whole to the creditor in terms of management and realization” (Slovenia NRP 2018).

For its late 2013 asset purchases from NLB and NKBM (as well as its later purchases from Abanka), the BAMC planned for a six-month transfer “in a series of transactions grouped into tranches,” but documentation and time issues forced it to abandon this policy early on (Bancni vestnik 63[11]). In the discussions leading up to these purchases, the government and the Bank of Slovenia wanted the first tranche to be “substantial in size,” but banks favored a smaller transfer, as they were presumably aware of the scale of the documentation problems (BAMC 2014). A 2013 document states that the government planned for the first package to contain “claims against clients in bankruptcy procedures,” for the second package to contain “claims against non-payers insured with real property,” and for the third package to contain “other claims (against restructuring companies, including financial holdings)” (Slovenia NRP 2013).

In actuality, these asset transfers happened at one time and the banks transferred the associated documentation to the BAMC over the next six months. In the meantime, the banks would “act as BAMC’s trustee or asset manager” for the relevant loans (BAMC 2014).

The Slovenian government’s 100% ownership of many companies whose exposures were transferred to the BAMC, as well as its 100% ownership of the participating banks, proved to complicate the asset transfer process. The BAMC’s legislation required the BAMC to recognize asset transfers related to these companies as transactions “between undertakings under [the] common control” of the Slovenian government (BAMC 2019; BAMC 2014). The BAMC revalued these assets upon transfer after they saw that some assets had transfer values that were higher than the values calculated in the AQR. They referred to this €92.6 underpayment as the “day-one” losses associated with revaluing transferred assets, recognizing them as a reduction in the BAMC’s equity (BAMC 2014).

The ZUKSB said that participating banks (in collaboration with the Bank of Slovenia) would propose initial valuations and transfer prices for the assets, which would then then be finalized (or recalculated entirely) by the Inter-Ministerial Committee (ECB 2013; Bancni vestnik 63[11]; Havrylchyk 2013).

However, final approval ultimately fell to the EC DG Comp, which repeatedly rejected the valuations proposed by the participating banks and the BoS for being too high (BAMC 2014). The EC also argued that these high valuations entailed “an inappropriate amount of state aid” after conducting its own valuation of a sample of loans from the two largest banks. Before approving the valuations and transfer prices, the EC DG Comp required that the Slovenian government hire a team of independent experts to calculate them as part of the larger AQR/ST. While we do not know the haircuts on these assets under the original valuations, the valuation from the team of independent experts were eventually approved by the EC DG Comp and resulted in a 71% haircut (EIU 2013-07-05; Bancni vestnik 63[11]).

When the transfers eventually happened, the Bank of Slovenia evidently refused to share its methodology for calculating these figures with the BAMC. This frustrated the BAMC, which then had to use “consultants to get hold of data from banks, asset by asset, and prepare separate valuations” (Bancni vestnik 63[11]).

Although the valuations eventually approved by the EC apparently did not include this feature, the EC noted that the BAMC’s bylaws provided for transfer values being “reduced by up to 3% of the asset value to cover the administrative and operational costs of the BAMC for managing the assets” (EC 2013-04-10). The BAMC was frustrated with this non-inclusion. It argued that “reducing the value of the transferred assets by the cost of financing and operational costs” was a “fundamental precondition for the financial sustainability of the BAMC” (BAMC 2014).

The BAMC disposed of assets (equity, debt, and real estate) on a case-by-case basis following the “principal of an economic and transparent use of public funds and their highest possible recovery,” though this sometimes involved transfer to the SSH (presumably at a discount) (Nyberg 2014). Once the BAMC acquired assets, it would revalue them according to their fair value and use the valuation to determine whether a recovery (involving enforcement and liquidation or value improvement) or restructuring (collaboration with BAMC to maximize the going concern value of the asset) asset management strategy would maximize the value of the relevant collateral. This valuation involved comparing BAMC’s cash flows under each strategy using “a probability-weighted average of present values of cash flows of both scenarios discounted at a discount rate” representing the BAMC’s costs. For the restructuring scenario, the BAMC calculated the present value of cash flows by looking at the “debtor’s cash flow forecast and the debt servicing capability,” while the BAMC calculated the figure by looking at “the realistic outcome of realizing collateral” in the recovery scenario (BAMC 2014a).

Although the BAMC did not say why they created these particular strategies, it did state that it tended to favor the recovery strategy because of the generally “poor quality of the claims” (BAMC 2016). Sometimes, even after the 2015 changes to the AMC’s corporate governance, the government ordered the BAMC to transfer certain exposures to larger corporates to the SSH (BAMC 2019; IMF 2017).

The BAMC’s initial exit strategy was to sell ten percent of its assets each year until the end of its approximately five-year lifetime, at which point it would transfer any remaining assets to the SSH. This strategy was imposed on the organization (IMF 2014; Bancni vestnik 63[11]). However, the feature was in tension with the BAMC’s goal of maximizing returns to minimize the taxpayers’ burden while repaying the BAMC’s bonds (Bardutzky 2016; BAMC 2014; IMF 2014).

The BAMC initially had a five-year lifetime (where the BAMC would wind down by December 13, 2017) (Bancni vestnik 63[11]). Amendments to the ZUKSB eventually extended the lifetime to 2022 to decrease the risk of a fire sale (BAMC Strategy 2016). As of early 2021 there are questions about where the BAMC will have its lifetime extended again (Slovenian Press Agency 2019-12-20; Slovenian Press Agency 2019-12-23).