Greece: Piraeus Bank Restructuring, 2015

Piraeus Bank’s liability restructuring was part of Greece’s third EAP, a loan package worked out with the European Union to address Greece’s ongoing sovereign debt crisis (Piraeus 2016b). A European Commission (EC) study characterizes the Greek’s approach as safeguarding the four systemically important banks and concentrating state support on those banks (Andruszkiewicz et al. 2020). Since Piraeus Bank was one of the systemically important banks, measures including this restructuring were taken to preserve financial stability (Andruszkiewicz et al. 2020).

In October 2015, a comprehensive assessment from the European Central Bank’s Single Supervisory Mechanism examined the four systemically important banks in an asset quality review and stress test, against baseline and adverse macroeconomic scenarios developed with the European Banking Authority (EBA) (ECB 2015b). This assessment identified a capital shortfall of EUR 4.66 billion at Piraeus Bank, including EUR 1.94 billion under a baseline scenario and an additional EUR 2.72 billion under an adverse scenario (EC 2015a; EC 2015b). Following the assessment, the ECB required the Banks to submit plans on how they would cover their capital shortfalls by November 6, 2015 (ECB 2015a). Piraeus Bank submitted a recapitalization and restructuring plan. That plan included the 2015 liability management exercise (LME), which had been launched earlier, in October, before the release of the stress test results (EC 2015a). In the LME, Tier 1, Tier 2, and senior noteholders could choose to convert their notes into new ordinary shares or opt for a small amount of cash (EC 2015a). Other elements of the restructuring plan included issues such as nonperforming loans (NPLs), cost containment and profitability, and governance enhancements (EC 2015a).

In addition to restructuring its liabilities, the Bank had another restructuring plan that included integration of several other resolved Greek banks, reducing operating expenses, increasing net interest income, making risk management more efficient, and downsizing international operations through the sale of noncore assets outside Greece (EC 2014; EC 2015b). As part of this plan, the Bank closed 234 branches in 2014 and 61 branches in 2015 and decreased its workforce through voluntary exit schemes (EC 2015a). This restructuring plan was initially approved by the EC in July 2014, and was then revised and resubmitted in November 2015 along with the Bank’s recapitalization plan (EC 2014; EC 2015b).

The EC’s approval of the Bank’s recapitalization and restructuring plan was contingent on changes to the Bank (EC 2015a). Changes included establishing an “efficient organizational structure” where the “Internal Audit and Risk Management departments are fully independent from commercial networks and report directly to the board of directors” (EC 2015a). Additionally, Audit and Risk Committees within the board of directors were responsible for assessing issues raised by the Audit and Risk Management departments (EC 2015a). The EC also required the Bank to provide the list of shareholders holding 1% or more of ordinary shares to the “competent authorities” (EC 2015a). Additionally, a monitoring trustee had been established in the EC’s approval of the 2014 restructuring plan whose responsibilities were extended by the EC’s approval of the 2015 recapitalization and restructuring plan (EC 2015a). The monitoring trustee was to be an observer of the Bank’s board of directors meeting (EC 2015a). Some aspects of the Bank’s restructuring were applicable regardless of whether the country was under the EAP, specifically regarding competition and State Aid rules (EC 2015a). Elements focused on broader economic recovery and financial stability were tied to the EAP (EC 2015a).

To cover the capital shortfall identified on October 31, 2015, by the SSM, the Bank raised capital privately and received a capital injection (see Schaefer-Brown [forthcoming]) from the HFSF (EC 2015b). The private capital covered the capital needs identified for the baseline scenario, and the capital injection covered the additional needs for the adverse scenario (EC 2015b). In December 2015, the HFSF recapitalized the Bank by issuing EUR 2.72 billion in European Stability Mechanism notes and received EUR 680 million in ordinary shares and EUR 2.04 billion in new CoCos (ESM n.d.; HFSF 2016a). The European Stability Mechanism (ESM) disbursed these notes to the HFSF through the Greek government. The government used the notes to buy shares in the Bank; the Bank could then establish repurchase agreements for the notes with the ECB. The HFSF shares had special voting rights, designed to allow the HFSF some influence over the Bank’s governance, and other specifications safeguarded the bank’s autonomy. Figure 2 details the capital shortfall at the Bank and how the Bank covered this shortfall.

The SSM, responsible for the comprehensive assessment of the Bank, is part of the ECB and refers to the European system of banking supervision (EC 2015a; EC 2015b; ECB n.d.). The ECB has the authority to conduct supervisory reviews (ECB n.d.). The EC needed to approve the Bank’s restructuring and recapitalization plan to ensure it complied with the European Union’s State Aid rules, which required that junior bondholders share the burden (EC 2015a). Burden sharing was approved by the HFSF, which also was the authority responsible for later approving and providing the capital injection (HFSF 2016b). The HFSF law outlined these specific mechanics. The Ministry of Finance for each member state is responsible for ensuring no State Aid is inappropriately granted.

The Bank launched the 2015 LME in October 2015 (EC 2015a). The HFSF approved the LME prior to its launch (HFSF 2016b).

The 2015 LME was one of the first steps the Bank took to cover its capital shortfall; other actions included book building to raise additional private capital, recapitalization through the HFSF, and additional restructuring of the Bank’s operations (EC 2015b).

The HFSF was responsible for approving the 2015 LME, monitoring the book-building process for raising private capital, and providing the funding for the capital injection (EC 2015a). A selection panel selects the members of the Executive Board and the General Council of the HFSF (HFSF n.d.b). This panel is made up of a chairman and two additional members appointed by the EC, the ECB, and the ESM; two members appointed by the minister of finance; and one member appointed by the Bank of Greece (HFSF n.d.b). The EC, ECB, and ESM monitored the Bank because it had received state funding.

On October 15, 2015, the Bank announced the 2015 LME exchange offer to its noteholders (Piraeus 2015a; Piraeus 2015b). In the announcement, the Bank said that the exchange offer was in preparation for the results of the SSM’s stress test because if the EC were to require the Bank to cover any capital shortfall, the noteholders would be required to share the burden (Piraeus 2015b). A Reuters article from the next day characterized the LME as a preemptive move to prepare the Bank for the results of the SSM’s stress test in order to secure funding (Durand 2015). The Bank also made a later announcement, on November 6, 2015, following the noteholder vote (Piraeus 2015d). This announcement said that the requisite majority of noteholders had passed resolutions making the exchange offer mandatory for all noteholders (Piraeus 2015d).

On November 4, 2015, the Bank released a presentation containing information about its recapitalization plan to cover the capital shortfall identified by the SSM (Piraeus 2015h). Part of this plan was the 2015 LME (Piraeus 2015h). In the presentation, Piraeus stated that the LME had been launched on October 15 and estimated it could generate up to EUR 600 million (Piraeus 2015h). The Bank also issued press releases throughout the month of November with information pertaining to the capital raising process including the 2015 LME (Piraeus 2015c; Piraeus 2015e).

The bank provided more information about the capital injection in its 2015 Annual Report (Piraeus 2016b). According to this report, the Bank received an injection of EUR 4.66 billion in December 2015; this value included capital raised through private means, including the 2015 LME, and capital provided by the HFSF (Piraeus 2016b). The report said that the “recapitalization created significant additional capital reserves” and that this improved the resilience of the bank’s balance sheet, with the Bank recording a slight deposit inflow in December 2015 (Piraeus 2016b).

The bank’s 2015 recapitalization and restructuring plan was funded by the 2015 LME, private capital raising, and the HFSF (EC 2015a; EC 2015b). The capital needs of the Bank were EUR 4.66 billion; of this, EUR 1.94 billion was needed to cover the baseline scenario and an additional EUR 2.72 billion was needed to cover the adverse scenario (EC 2015a; EC 2015b). As previously mentioned, the Bank was required to cover its capital needs for the baseline scenario through private means to receive additional funding from the HFSF (EC 2015a). Part of this was the 2015 LME, in which Tier 1, Tier 2, and senior notes were converted to ordinary shares, raising EUR 602 million (EC 2015a). In addition, the Bank raised EUR 1.34 billion from the market (EC 2015a).

Additional funding to cover the costs of the adverse scenario came from the HFSF in the form of ESM notes (EC 2015a).

The LME and recapitalization facilitated an open-bank restructuring of Piraeus Bank. To cover a part of its baseline capital needs, the Bank restructured its liabilities by engaging the debt-to-equity conversion feature of its senior, Tier 1, and Tier 2 notes in the 2015 LME (EC 2015a).

Senior notes, Tier 2 (subordinated), Tier 1 (hybrid), and equity were all impacted by the bank’s liability restructuring (EC 2015a). This happened through two actions of the bank—first, the 2015 LME, and second, a share capital increase through a public offering (EC 2015a).

The 2015 LME, launched in October 2015, engaged the debt-to-equity conversion feature of the bank’s senior, Tier 1, and Tier 2 notes (EC 2015a). Noteholders were given the option to choose between converting their notes to new ordinary shares from the capital increase or taking a small amount of cash (EC 2015a). The new ordinary shares were worth 50% of par value for Tier 1 notes and 100% for Tier 2 and senior notes (EC 2015a). The small amount of cash was 43% of par value for senior notes and 9% for both Tier 1 and Tier 2 notes (EC 2015a). At a meeting on November 4, 2015, the majority of noteholders in attendance voted in favor of amending the terms of the notes to make the exchange of notes mandatory (EC 2015a). Therefore, all noteholders were required to exchange their notes, creating a 100% participation rate resulting in the full elimination of all hybrid capital (Tier 1), subordinated (Tier 2), and senior unsecured debt instruments (EC 2015a). Only a small proportion of bondholders took the cash option, and the EC described this option as symbolic (EC 2015a).

According to sources at the ESM, although the 2015 LME was voluntary, it was clear that if noteholders voted against it, the recapitalization would have failed, and the Bank would have entered resolution—meaning the liabilities in question would have converted on worse terms. The offer was structured with this as well as the “no creditor worse off” principle in mind.

The public offering of new shares took place in November 2015 and raised EUR 1.34 billion (EC 2015a). The Bank convened an emergency general meeting of its shareholders where they decided to increase the nominal value of each ordinary share (HFSF 2016b). They did this through a reverse split with a respective decrease of the total number of shares at a ratio of 100 old shares to one new share such that the value of each share became EUR 30 (HFSF 2016b). Then the Bank decreased the share capital by decreasing the nominal value of each share from EUR 30 to EUR 0.30 (HFSF 2016b).

Additionally, in December 2015, the HFSF recapitalized the Bank with EUR 2.72 billion in loans from the European Stability Mechanism to the Bank and got EUR 680 million in ordinary shares and EUR 2.04 billion in CoCos (ESM n.d.; HFSF 2016a). The nuanced decision of how many ordinary shares versus CoCos to issue took into consideration the fact that issuing too many ordinary shares could mean the nationalization of the bank. CoCos act as a buffer but are more expensive, as they come with high-interest coupons that can reduce the bank’s profit. If the Bank misses two interest payments, a conversion is triggered, and the bonds turn into ordinary shares, which can dilute the current shareholders control and can reduce the share value. Figure 3 shows the balance sheet of the Bank in September 2015 and December 2015.

Through all of the Greek EAPs, all individual depositors were preserved (Andruszkiewicz et al. 2020).

Commitments the Bank made in its 2014 and 2015 restructuring and recapitalization plans included decreasing its foreign asset exposure, divesting from foreign assets, selling off foreign activities, and refocusing on the domestic market (EC 2015a). Additional restructuring included the sale of NPLs (EC 2015a). In June 2019, the Bank announced that it had completed the “last major milestone” toward the State Aid commitments made in the bank’s 2014 and 2015 restructuring and recapitalization plans (Smith 2019). The “major milestones” that the Bank completed were necessary for the legality of the State Aid; however, elements of the restructuring plan are ongoing.

The HFSF had a nonexecutive member representative on the bank’s board of directors (HFSF 2016b). The HFSF had veto rights on certain bank transactions. In accordance with the memorandum of understanding signed in August 2015, the HFSF introduced a program to review the board and committees of Piraeus Bank, which was completed in 2016 (HFSF 2016b). This program evaluated the size, operation, organization, structure, and the allocation of powers within the board and committees (HFSF 2016b).

Additionally, the EC’s approval of the bank’s recapitalization and restructuring plan was contingent on changes to the Bank (EC 2015a). This included establishing an “efficient organizational structure” where the internal audit and risk management departments were “fully independent from commercial networks” and reported to the board of directors (EC 2015a). The Audit and Risk Committees within the board of directors were then responsible for assessing any issues raised by these departments (EC 2015a). The EC had also established a monitoring trustee to be an observer of the bank’s board of directors meeting when they approved the 2014 restructuring plan (EC 2015a).

Research has not revealed evidence of cross-border cooperation.

When the EC approved the bank’s recapitalization and restructuring plan, its approval of the recapitalization was contingent on the restructuring elements of the plan (EC 2015a; EC 2015b). Restructuring included efforts to integrate recently acquired Greek banking activities through a reduction of operating expenses, increasing net income, and risk management and downsizing of the bank’s international operations (EC 2014). Restructuring was to be monitored by an independent trustee (EC 2014).

The bank launched the 2015 LME on October 15, 2015, and completed it November 27 (EC 2015a).

The bank’s larger restructuring plan in 2014 set commitments that were then revised by the restructuring and recapitalization plan in 2015 (EC 2015a). In June 2019, the Bank announced that it had completed the “last major milestone” toward the commitments of the bank’s 2014 and 2015 restructuring and recapitalization plans (Smith 2019).