As Clock Ticks for Troubled Bank, Cyprus Hopes in U.S. Funds

(Bloomberg) -- A plan to carve out and sell the performing assets of Cyprus Cooperative Bank Ltd is attracting interest from U.S. investment funds, said Nicholas Hadjiyiannis, Chief Executive Officer of the troubled Nicosia-based lender.

Burdened by 6.2 billion euros ($7.6 billion) of non-performing exposures --equal to about one third of the country’s total economic output-- Cyprus Coop is struggling to stay afloat amid a capital shortfall and continuing deposit withdrawals. Last month, it launched a tender to find an investor either to buy all of the lender through a capital raise or to acquire the performing part of the bank.

“Three U.S. funds are among investors who have shown interest in acquiring the good part of Cyprus Coop,” Hadjiyiannis said in an interview April 18 in Nicosia. While he declined to name the funds for confidentiality reasons, Cypriot media have reported interest from Lone Star Funds, Atlas Merchant Capital and J.C. Flowers & Co.

Under the plan, which is subject to approval by the European Union’s competition watchdog, most of the non-performing assets will be transferred to a state-backed asset management company. Failure to secure regulatory approval and get investors on-board would risk reigniting the financial crisis that crippled the island’s economy in 2013, while the shockwaves could spread into neighboring Greece and Italy, where banks are also struggling under a mountain of bad loans ahead of an EU-wide stress test.

Deposit Outflows

Amid rumors of a haircut on Cyprus Coop deposits that lead to outflows of 1.9 billion euros in the first three months of 2018, the Cypriot government deposited 2.5 billion euros in early April at its troubled lender in order to avert a liquidity crisis. Deposit losses slowed after the move, according to Hadjiyiannis.

Cyprus issued bonds worth 2.35 billion euros with 15 to 20 years maturity to finance the deposit and received as collateral the lender’s non-performing loans and real estate portfolios and shares for a total value of around 7.6 billion euros. Cyprus Coop itself bought the bonds and the move increased Cypriot debt by about 12 percent of the country’s gross domestic product.

Cyprus Coop’s salvaging plan foresees a capital increase by Hellenic Bank Pcl -- Cyprus’s third biggest -- backed by the interested U.S. funds, according to people familiar with the matter. Following the capital increase, Hellenic would buy the performing assets of Cyprus Coop, leaving the bad loans with an asset management company, similar to Ireland’s National Asset Management Agency.

“Investment funds have expressed interest for Hellenic if the bank secures the performing part of Cyprus Coop,” Hellenic Bank officials said, requesting anonymity as the talks are private. Hellenic has formally said it participates in Cyprus Coop’s tender.

Hellenic’s existing shareholders would have to approve any entry of the funds into the lender’s share capital. Third Point Hellenic Recovery Fund, owned by Third Point LLC, owns a 26.2 percent stake in the bank, while Wargaming Group Ltd has a 24.9 percent holding, according to Hellenic’s website. Hellenic’s shares rose 0.7 percent as of 12:40 p.m. in Nicosia.

SSM’s Preference

Finance Minister Harris Georgiades told lawmakers on April 18 that the option of merging the good part of Cyprus Coop with another bank has the backing of the ECB’s Single Supervisory Mechanism. The European Commission said it’s in discussions with Cypriot authorities, declining to elaborate further.

Apollo Global Management LLC is interested in buying a share of the asset management company, a Cyprus Coop bank official said. Apollo has an 85 percent stake in Spain’s Altamira Asset Management which in turn has a 51 percent stake in a joint venture with Cyprus Coop that manages the lender’s NPEs and real-estate owned assets.

Apollo declined to comment.

State Aid

While the European Commission has yet to rule whether the plan to split Cyprus Coop constitutes illegal state aid, the feeling is that the Commission will show understanding and allow to conclude the sale deal as long as the state plays no role in the administration of the asset management company, a Cyprus government official said.

Cyprus bailed out Cyprus Coop in 2014 injecting 1.5 billion euros from the 10 billion euros in emergency loans the country received from its European partners and the International Monetary Fund. In 2015, the government injected an additional 175 million euros to boost Cyprus Coop’s capital and is the lender’s main shareholder.

Binding bids for Cyprus Coop are expected by the end of April with the transaction scheduled to conclude in May. The lender hasn’t released financial results for the full year 2017, pending the outcome of the process.

--With assistance from Sarah Syed Sotiris Nikas and Aoife White

To contact the reporters on this story: Paul Tugwell in Athens at ptugwell1@bloomberg.net, Georgios Georgiou in Nicosia at ggeorgiou5@bloomberg.net.

To contact the editors responsible for this story: Jerrold Colten at jcolten@bloomberg.net, Sotiris Nikas at snikas@bloomberg.net, Nikos Chrysoloras, Stefania Bianchi

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