The NPL deal that could unlock the Cyprus market

Apollo’s purchase of a €2.7bn loan portfolio from Bank of Cyprus is expected to reactivate the island’s property market.

The long-awaited sale of a significant portion of non-performing loans from the balance sheet of Bank of Cyprus closed in August, with US private equity firm Apollo Global Management emerging as the buyer of a €2.7 billion portfolio known as Project Helix.

The deal – equal to around 14 percent of last year’s Cypriot GDP – demonstrates the island nation’s attraction to private equity capital, as it implements a recently approved legal framework for securitisations, designed to help banks reduce the high stock of NPLs hampering the economy.

Once the deal is approved by regulators, Apollo will pay around €1.4 billion for the portfolio. The transaction will be financed through a securitisation structure in which senior debt, equivalent to at least 65 percent of the purchase price, will be raised against the portfolio. Bank of Cyprus plans to provide €450 million of this senior finance and an independent third party has provided a commitment to the buyer for the remainder. Apollo, for its part, will fund the remaining 35 percent via equity.

Project Helix, secured against more than 9,065 properties and understood to include commercial and residential, was sold at an almost 52 percent discount to face value; less of a mark-down than Piraeus Bank’s Project Amoeba Greek NPL portfolio, which was sold in June to Bain Capital at a 70 percent discount. The lower discount is likely to reflect the more prominent location of underlying properties compared with some of the recently traded Greek portfolios, sources suggest.

“This portfolio has properties in the main cities of Cyprus,” says a local market player. “Greek NPLs, on the contrary, usually have real estate collateral located outside the most popular locations such as Athens or the Greek islands.”

As a rough calculation, the Helix deal puts Apollo in ownership of around 14 percent of the non-performing exposures of the Cypriot banking sector, based on the €19.9 billion total stated at the end of April by the Central Bank of Cyprus. The market is far smaller than Greece, which had €92.4 billion of NPE at the end of March.

“The majority of NPLs in Cyprus are backed by real estate securities; and investors know that local banks will not be able to deal with toxic loans unless they sell secured portfolios,” one investor in Southern European property debt explains.


Recovery in the Cypriot real estate market makes further transactions likely, as investors see greater scope for successfully recovering secured NPLs.
The Cypriot economy grew by 3.9 percent in 2017, as domestic demand, a booming tourism sector and investment activity drove growth. Meanwhile, the unemployment rate keeps declining, down to 11.1 percent in December 2017, from a peak of 16.1 percent in 2014.

Crucially for NPL buyers, recently introduced government reforms, including the strengthening of foreclosure laws and the introduction of a securitisation law, should help banks to reduce NPLs. The new framework outlines procedures for securitisation transactions and grants supervisory and regulatory powers to the country’s central bank.

Commercial property prices in Cyprus are rising, according to PwC data. Office prices increased by 7 percent on the back of increased demand for grade A space, while retail property prices increased by 3 percent, from Q4 2016 to Q3 2017. During the same period, residential property prices experienced a 4 percent increase.

Apollo is buying into a market in which liquidity of real estate debt remains, to a large degree, untested. Sources say local banks have demonstrated appetite to lend against property assets, with some offering loan-on-loan finance for smaller portfolios at pricing ranging from 3.5 percent to 4 percent. Liquidity, another source notes, may improve as follow-on transactions from NPL deals materialise.

“Institutions are maintaining stricter underwriting standards for new lending compared with loans generated before the crisis. We expect new lending to be based on borrowers’ capacity rather than collateral and personal guarantees – as used to be the case before the crisis,” rating agency S&P said in a report from November last year.


Vulnerabilities, however, persist – from high levels of private sector debt and the impaired Cypriot banking system. In real estate, investors are also concerned about a potentially increased supply of properties for sale in the future, as the number of foreclosures is expected to rise. “As Cyprus is a small island, it remains to be seen if supply is going to be covered by demand, which will affect values,” a local investor says.

Despite challenges and the complexities of the market, several sources canvassed by Real Estate Capital insist that investors remain interested in buying the island’s bad loans.
“We have started to see investors commit to Cyprus, and put real money into the country,” Ajay Rawal, partner, EMEA banking restructurings at EY, says. “In Cyprus we see interest in not just an individual loan, but broader investor interest in buying loan portfolios. The emergence of servicers also supports the development of the loan sale market.”

In 2017, Hellenic Bank sold a controlling stake in its servicing operation – which manages €2.5 billion of loans – to Czech APS, while state-owned Cooperative Bank – with more than €7 billion in NPLs – did a similar servicing deal with Altamira of Spain, selling a majority stake in a new servicing vehicle created to manage the entire NPL portfolio of the bank. In December 2017, servicer Pepper entered into an agreement with Bank of Cyprus to manage an €800 million portfolio of retail and SME NPLs.

Cyprus is a small market and a handful of NPL deals could see a large proportion of the capital behind its real estate change hands. These are early days for the sector, with the first NPL transaction, Hellenic Bank’s sale of a €145 million NPL portfolio to B2 Kapital Cyprus at an undisclosed price, closing in January. Although the market remained virtually untested until August, the recent mammoth sale to Apollo is expected to pave the way for further transactions.