CORRECTED-Millennium BCP could back Greek bank with repo trade

(CORRECTS typo in headline)

By Owen Sanderson

LONDON, May 25 (IFR) - Two new Greek structured finance deals have been listed on the Channel Islands Exchange, puzzling market participants who question how they can be used for funding.

The originator Millennium (a subsidiary of Portuguese bank Millennium BCP) described the deals, Kion Mortgage Finance 3 and Kion CLO 1, as part of a private bilateral transaction. They are said to be designed "to raise funding through the parent", though the parent may not be the ultimate liquidity provider.

European banks with Greek subsidiaries are looking for ways to match local assets with local funding. For instance, Credit Agricole applied to the Greek central bank to give its Emporiki subsidiary access to the Emergency Liquidity Assistance (ELA) programme last week, putting it on a par with local banks which have taken up to EUR100bn through the special measures.

A funding official at a Greek bank said the Kion issues might work as collateral for a market counterparty willing to extended short term credit at high advance rates - a possibility also suggested by a London-based structuring banker.

The first official also suggested that the euro notes could be used by the Portuguese parent as collateral to obtain ELA from its own central bank. However, a Greek whole loan book would be ineligible unless the underlying loans were governed by Portuguese law.

Both deals feature Swiss franc and euro-denominated notes with margins far below market rate - 20bps for the senior and 35bps for the class B notes on Kion Mortgage Finance. The Swiss franc notes cannot be used to raise finance through Emergency Liquidity Assistance (even if Millennium has access to the facility - details are kept private). The deals also lack a public rating, which they would need to be used as ECB collateral, though any rating would almost certainly be too low for regular ECB operations given rating agencies' country caps on Greece.

Transaction documents for the deals have no language relating to currency redenomination - a huge issue for Greek structured finance deals. If underlying assets (subject to Greek law) are redenominated into a devalued currency while the SPV liabilities remain in euros and Swiss franc (and governed by English law), cashflows to the notes will be severely restricted.

CONTRACT STRENGTH

However, a structured repo contract could include provisions on redenomination and capital controls to help protect Millennium's counterparty, even if the transaction documents do not.

Law firm Ashurst said in a note published earlier this year that standard GMRA repo documentation was "typically somewhat unsatisfactory" when it came to specifying a tight definition of currencies. However, it added that there is a line item for contracting parties to specify contractual currency "in order to add certainty."

The latest version of GMRA comes with stronger protections for repo counterparties, including exclusive jurisdiction of English courts and a fallback currency if the 'Base Currency' ceases to be convertible.

But there is nothing equivalent to the illegality or force majeure clauses in the standard GMRA contract - this means that if strict exchange controls were imposed (making it illegal for the Greek subsidiary to repurchase the deals at the end of the repo using euros or Swiss francs) the outcome would be uncertain.

A local law of this kind could even be upheld by English courts, according to the Ashurst note, which could lead to an event of default. (Reporting By Owen Sanderson)