By SOLVDEBT Articles September 4, 2023

Following government announcements, a new possibility for loan haircuts through the creation of special purpose vehicles (SPVs) is introduced.

A way out for thousands of borrowers

The establishment of special purpose vehicles (SPVs) will give a way for thousands of borrowers, both individuals and small and medium-sized enterprises, to achieve a haircut on their loan and to more easily meet their loan repayments.

Let’s not forget that the partial write-off of a loan, with the repayment of a significant part of the loan either in a lump sum or in a short period of time, is a practice that the Loan Managers -Funds already follow.

However, for most of the borrowers, access to borrowing from the Greek banking system is prohibitive, as they have red loans that are on the Tiresias lists.

How is the “haircut”;

Special Purpose Vehicles (SPVs) are to undertake the financing of debtors (natural and legal persons) in order to buy back their securitised loans from the Funds.

The acquisition of the loan by the SPV is conditional on a discounted pay-off by the Fund.

The “haircut” loan will be transferred to the new company (not a bank) together with its collateral (e.g. a mortgage or a pledge). The debtor will then enter into a new loan repayment agreement with the special purpose vehicle (SPV) that purchased its loan.

How much “haircut” can I get on my loan?

It is usually the first question a debtor asks when discussing their loan.

We have written a whole article on this topic entitled “How can I get a haircut on my loan?”

As regards the sale of the loan to an SPV in order to agree on the haircut, the fund would first have to value the loan in order to make its proposal.

Therefore, in order for the Fund to arrive at the price it will ask the SPV to pay, it must first answer a number of questions.

Is there an active arrangement for the loan or not?

What is the value of the collateral and what percentage of the loan is covered?

Is the debtor legal person functioning or not? If it is operating, what are its financial data?

If the debtor is a natural person, has he/she been classified as a “vulnerable debtor”? If not, what are his or her financial circumstances?

Has the loan been terminated or not? If so, what stage is the legal action at?

These are just a few of the questions that the Fund itself will have to answer in order to arrive at a sale price for the loan that it considers to be advantageous. However, the final sale price of the loan is expected to be finalised following the SPV’s counter-proposal.

But why would the Loan Managers – Funds “mow ” a “red loan”?

Quite simply, by acquiring the loan from an SPV, the loan management company will prefer to collect in cash today or in the near future (less than a year) a large percentage of the loan, rather than waiting to be in uncertainty about what it will collect in the future through regulation or through costly legal actions (e.g. foreclosures and auction).

Moreover, let’s not forget that a large part of the loans that the funds have bought are loans that are in advanced legal actions with borrowers who are not “sweating their ears” and only a generous debt cut could bring them back to the “negotiating table”.

Especially for the majority of debtors who are small and medium-sized enterprises, it is often observed that their owners have proceeded to set up other businesses (“clean” in Tiresias) through which they continue their business activity normally, without the burdens of the past. Indeed, it is very common for the new business to be set up by the debtor’s adult children or other relatives, and to be managed normally by the debtor.

What is the benefit for the special purpose vehicle (SPV) to buy out a red loan?

Obviously the acquisition of a qualifying red loan involves risk for the special purpose vehicle (SPV). So why would it do so?

Firstly, the SPV will carry out an evaluation of the red loan before taking it over.

The first important element that will be taken into account in the assessment is the percentage of the haircut that the Fund will offer in the event of a buy-out of the loan. Also, another important element is the collateral that the loan has and its value. For example, is the loan secured by real estate? What kind? (residential or commercial) Of what value? Does the property have special issues? (e.g. planning infringements to be legalised?)

And last but not least, it has to do with the actual financial capacity of the debtor to meet the new loan to be concluded with the SPV, so that it can be repaid smoothly. In addition, the SPV will be asked to agree with a debtor who has previously failed to meet the agreed repayment terms of the loan and will have to assess whether this failure was caused by factors that the debtor was unable to manage (e.g. income restriction, health issues, external factors, etc.) or whether it is a strategic defaulter, which it would be advisable to avoid.

It’s in my best interest to sell my loan from Fund to SPV;

The obvious answer is that it is in your interest to sell when it is accompanied by a satisfactory haircut. However, the payment plan agreed with the SPV afterwards is also important, what payments it will provide for, what the duration of the arrangement is and what the borrowing costs are (variable or fixed rate), so that you avoid the possibility of “going for the wool, and coming out with a haircut”.

Instead of epilogue

The intention of the state to enact a law to “haircut” red loans (owned by funds) by selling them to special purpose vehicles (SPVs) is moving in the right direction as it is expected to “free” thousands of borrowers (individuals and businesses) from a vicious cycle of red loans that cannot be serviced under the current economic conditions (financial crisis, accuracy, inflation).

However, this initiative is still at a primary stage and it remains to be seen the terms and conditions and its implementation in practice, in order to form a final opinion on its contribution to the social issue of red loans.

We have 20 years of experience in bank loan restructuring and can help you substantially in solving your debt problem.