Description

PVMEZZ.AT: Phoenix Vega Mezzanine Plc

ISIN CY0109561015

Last Price: EUR 0.0630

I believe the Phoenix Vega Mezzanine Plc is a very positively convex instrument to ride the resurgence of the Greek economy, offering the comfort of a last-twelve-months 36% EV dividend yield that, if sustained, should help derisk the exposure, and also a shot at a significant upside with the long-term potential for a x3 bagger.

By way of warning, I would recommend to put your big boy’s pants on. Access to the Greek stock market is still not immediate and requires some extra paperwork to be processed by your custodian. This security trades on a non-regulated special segment of the Alternative Market, is fairly illiquid with a cap below EUR 100 million, and ultimately, the cash-flows and the initial underlying business plan behind them, as well as the potential conflicts of interest between senior and mezzanine holders and collection agents of the securitization, remain fairly opaque.

Getting exposure to Non Performing Greek exposures from the largest Greek bank

Phoenix Vega Mezzanine Plc, or PVMEZZ, is a Special Purpose Vehicle with just one class of common securities and one single type of credit assets. Its sole purpose is to hold (or sell in the secondary market) Mezzanine and Junior Notes and distribute the coupons deriving from them net of tax and corporate expenses. In this note I will solely consider the Mezzanine Notes and ignore any potential upside and cash-flows from the Junior tranches which have a minimal hope to collect any payments whatsoever. PVMEZZ possesses 65% of the Mezzanine Notes of a specific Piraeus Bank Non Performing Loans securitization, with the balance split between Interim AB the Swedish debt collector at 30% and a 5% retained (by design, skin in the game blabla) by Piraeus Bank.

Those Notes give right to receivables from non-performing loans underwritten by Piraeus bank and later repackaged and partly risk-transferred in May 2021 through a large-scale (EUR 6.7 billion) securitization under the Hercules Asset Protection Scheme ("HAPS") Greek program.

The underlying NPL portfolio

Phoenix is a portfolio consisting mainly of non-performing residential mortgage loans with gross book value amounting to € 1.7 bln and very high Real Estate collateral. Vega is more diversified but with much lower collateral, with non-performing retail loans for a gross book value amounting approx. € 1 bln, and non-performing commercial and corporate business loans with gross book value amounting circa to € 4.0 bln. I have read reports stating that (but I could not cross-check), that the average aggregated collateral value is close to 60%.

The HAPS manoeuvre to free capital for banks and reduce NPLs

HAPS started in October 2019, with the agreement of the European Commission and with a view to reduce the heavy burden of Non-Performing Loans that were keeping any recovery in the issuance of new bank loans mute: at the time the stock of NPLs, whilst in constant reduction year after year, was still sitting at more than 70 billion for the 4 major banks (still exceedingly large in comparison with the size of the country) , with NPL ratios hovering between 30% and 49% after peaking at 50% in 2016. The HAPS scheme aimed to accelerate Greek banks’ disposal of NPLs on top of the outright sales that were already taking place, removing what represented a major impediment to any speedy economic recovery. Through HAPS the Greek government extended a state guarantee to banks like Piraeus, Alpha Bank, or NBG which kept the least risky, senior tranches of the securitization bonds, and could get an immediate benefit through capital relief in terms of capital adequacy calculation purposes: the single supervisory mechanism (SSM) approved that senior notes will have zero risk weight in banks' regulatory capital framework, despite the non‑investment‑grade sovereign rating on Greece at the time.

Other than greatly reducing their capital requirements, benefits for banks include additional liquidity and price discovery.   The structure required that a minimum of 5% of mezzanine must be retained by the Bank to comply with risk retention requirements for the originator to keep skin in the game. Piraeus also transferred the servicing of those NPLs to a third-party Servicer, Intrum AB, receiving, on average, 15 basis points of Gross Book Value in management fees and performance collection fees of about 10% of collections.

The basic waterfall looks like this:

Key waterfall takeaway: The payment of the interest of the Senior Notes precedes the payment of the capital and the interest of the Mezzanine Notes.

Mezzanine interest deferral mechanism and the acceleration clause: When the interest payments of mezzanine tranches are due and a performance trigger occurs, for example if the total net collections from the beginning of the portfolio servicing is less than 15% or more of the budgeted net collections, a delay of mezzanine tranche interest payments could happen. In this scenario the payment will be resumed only when the next mezzanine tranche interests is due or when the cumulative actual recoveries are equal or greater to initial business plan projected recoveries, or in the case senior tranche has been repaid (fully). This is meant to insulate the senior noteholder and the guarantor against other noteholders' opportunistic behavior. That would anyway be detrimental to our investment case, the payment of the capital and interest of the Senior Notes would precede the payment of interest (and capital) of the Mezzanine Notes and possibly we would have to wait and hope that all senior principal is repaid before our mezzanine coupons can resume.

Some Principal/Agent risk with the servicer, the senior and the mezz holders in their cross-hairs?

We are very much betting on a jockey here, the Servicer, Intrum Hellas, to prove its ability to manage, enforce, sell or restructure the Loans within the  Phoenix and Vega Portfolios.

We also know that the waterfall opens the possibility, in case of lags and subpar collection, of an acceleration event that could suddenly derive all cash-flows to the senior debt owners at the expense of the mezz holders.

Note that Intrum Hellas is a JV created preceding the securitization between Swedish Intrum AB 80% and 20% Piraeus Bank. Please note that it is the Senior debt holders that have the power to appoint the Servicer, not us. But interestingly, Intrum AB is also an anchor investor of this structure with a 30% stake in the Mezzanine notes. In fact, it is not implausible  Intrum had to bid for this mezzanine piece in order to win the debt collection mandates; this seems to be a common feature in other HAPS transactions (similar to the role of Davidson Kemper in the GalaxyCosmos deal).  It is not straightforward to know where the servicer’s fidelity and incentive lie. Would the servicer favour the 100% senior holder Piraeus that appointed them and could replace them at will in which case they would lose the juicy management and collection perf fees (0.15% GBV/10% of collections) of the mandate, or "side" with its majority parent Intrum Group’s chunky 30% Mezzanine stake? I would posit the former (my dirty estimate is that so far they have cashed in three times as much in servicer fees than in Mezz distributions).

Cash-flows and distributions have so far performed:

Those are the Mezzanine assets that PVMEZZ possesses:

 So far the Mezz coupons collected show as follows- note there are some lumpiness and lag effects-:

2021: EUR 8.7m (since April 2021)

2022: EUR 24.2m

2023: EUR 15.63m

After Cyprus's (where PVMEZZ is incorporated) 12.5% tax and some minor corporate costs, PVMEZZ has been able to distribute 18 mios in both 2022 and 2023, or 0.0144 per share per annum.

Valuation thoughts

I will assume a price post div of 0.0486 (today’s price minus 0.0144 div to be paid on 5th December). This puts the Market Cap at 60.77 mios, for a net cash position of EUR 10.59m and an EV at 50.17mios. That’s a LTM EV dividend yield of 36%. If we assume 2024’s distributions will keep the same pace, that’s a forward PE of x3.4. Looks certainly cheap enough to pique my interest!

Even though a mezzanine income is by no means really comparable to a corporate earnings, those free cash flow yield metrics look attractive to me: 4 years of similar collection rates would entirely derisk my equity here, and I would still have a go at a 3 bagger gain should the principal get repaid too. I observe that Paulson owns 18% of PVMEZZ, received during the Piraeus hive-down/spin-off process through its stake in Piraeus bank.  This long NPL mezz trade is also a way to play the sustained resilience of the Greek economy.

Risk factors exist beyond liquidity, and principal/agent risks

Recovery and collection rates will obviously depend on the strength of the Greek customer’s finances. It can’t hurt that S&P raised Greece to investment grade for first time in more than a decade in late October, on the back of very strong tourism inflows in the last years and a good pace of reforms. Macro guys point that Greek GDP is expected to rise 3 percent in 2024, outpacing more than twice the eurozone average.

But collection success also depends on the legal environment especially regarding foreclosure. The enforcement process, even after the many reforms and modernization has always been excruciating slow, complex and uncertain in Greece. Will third-party servicers be able to defend their interest in court as well the originator? This is still a question mark I believe.

Unfortunately I am afraid I have not been able so far to assess the initial business plan assumptions, nor did I get access to detailed servicer reports to track the quantum and pace of cash-flows. Some casual comments from the major Greek banks during earnings calls point to an over performance of their HAPS senior tranche in the last 24 months; this sounds positive, but it is vague and lacks flesh.

In my due diligence I performed some kind of channel checks with investment bankers involved in this type of securitizations in Greece and in Italy. They highlighted that most trades have been designed to maximize the size of the senior tranche, naturally, and its recoverability, and to minimize the likelihood of the trigger of the state guarantee; thus, without the mezz’s interests exactly at the forefront of their preoccupations. They also warned me that Greek (and Italian, where they are also common) HAPS type securitization business plans (in general) rely on too-optimistic assumptions as evidenced by the semi-failure of some early vehicles where diversion of mezz cash-flows towards the senior has already been activated; and that it would be cautious to assume that after a few years of performance the mezzanine tranches could be less likely to receive such steady high distributions.

Catalyst

Continued collection and recovery rates at similar pace than 2023

General performance of the Greek economy