Bank Assets Management Company (BAMC)

Slovenia became an independent state in 1991, separating itself from Yugoslavia amid the collapse of the Eastern Bloc. However, unlike other post-socialist states that emerged in the early 1990s, Slovenia “maintained a high degree of state intervention in the economy, from extensive state ownership of domestic industries to generous social protection” (Lindstrom 2015). For example, Slovenia had the highest proportion of government ownership of the banking system in the euro area, at 44% as of 2013 (Bank of Slovenia 2013). The country was accustomed to low levels of income inequality and low unemployment relative to its peers (Guardiancich 2016).

Slovenia joined the EU in 2004 and adopted the euro in 2007 (Balogh 2018). The country experienced economic prosperity, but cheap foreign credit facilitated by euro adoption fueled a construction bubble and aggressive leveraging of the corporate sector, resulting in a rapid deterioration of the net international investment position (IIP) (IMF 2012).^FNHousehold debt did not make up a significant portion of this bubble (IMF 2012, 4-6). The European Commission (EC) defines the net IIP as “the stock of external assets minus the stock of external liabilities” or, alternatively, the “value of foreign assets owned by private and public sector of a country minus the value of domestic assets owned by foreigners” (EC 2014). The deteriorating net IIP indicated that the country was increasingly vulnerable to volatility in international financial markets (EC 2014). Meanwhile, Slovenian banks had made many loans to the corporate sector. However, these banks had poor risk-management practices, and many loans were inadequately secured (Markovic-Hribernik and Tomec 2015).

The start of the Global Financial Crisis (GFC) in 2008 created economic instability abroad, and the flow of foreign credit into Slovenia suddenly stopped (IMF 2012). At first, Slovenia primarily felt the effects of the GFC through its large export sector (based around its large corporates) and its “oversized construction sector” (Krzan 2014; EC 2012). (See Figure 1.) However, Slovenian banks still needed to refinance as much as €5.5 billion in short-term debt, a sixth of the country’s GDP, within a year (OECD 2009). Banks hunkered down. They started trying to accumulate more liquid assets and limit lending (OECD 2009). Real GDP peaked and growth disappeared by October 2008; real GDP then shrank by almost 10% by mid-2009 (EC 2012). With depressed demand for exports and sluggish domestic demand, Slovenia’s corporate sector, which was already highly leveraged and reliant on foreign funding, faced mounting losses (IMF 2012). As a result, Slovenia’s banks faced substantial loan losses and difficulty accessing foreign funding. Banks increasingly depended on “ECB funding, bond issuances (both with and without government guarantees) and” the government placing deposits with them to keep operating (EC 2012). (See Figure 2.)

Figure 1: Contributions to Real GDP Growth in Slovenia by Sector (2007Q1–2010Q4)

Source: IMF 2011.

Figure 2: Asset Growth and Bank Funding in Slovenia (2007Q1–2010Q4)

Source: IMF 2011.

Even though it hurt Slovenian banks and corporates, the stress did not initially weigh on Slovenia’s sovereign rating. A 2014 paper notes that “[d]uring the 2008-09 global crisis, Slovenia was hardly affected by the crisis,” as “it was considered by investors a ‘safe’ euro area country” (Heinz and Sun 2014). The Slovenian banking system was still “one of the smallest in the euro area,” with total assets equal to only 139% of its GDP (Bank of Slovenia 2013).^FNThe Slovenian banking system had €46 billion in assets, and the 139% of GDP figure made it the third smallest in Europe (Bank of Slovenia 2013).

In 2009 and 2010, the government responded to the global financial crisis with relatively minor capital injections, credit guarantees, and expansionary fiscal policy (IMF 2009, 10; Damijan 2012; IMF 2011). These exercises allowed for a modest “export-led recovery” in 2010. This recovery was modest because domestic demand continued to weaken (EC 2012). The central bank, the Bank of Slovenia, had imposed new, more strict capital requirements (in line with Basel III) in 2010, a year earlier than other European countries, and banks had responded by cutting loans (Krzan 2014). After Slovenia’s largest publicly owned bank, Nova Ljubljanska Banka (NLB), failed to raise capital through a public offering to comply with EBA (European Banking Authority) recommendations, Slovenia injected €250 million in new shares in NLB with EC approval in March 2011, resulting in the government holding the majority of its shares (EC PR 2011; NLB 2011 Annual Report). Non-performing loans continued mounting across the banking sector, banks experienced significant losses, and credit growth turned negative as the economy entered recession again in 2011 (Krzan 2014; IMF 2012; Markovic-Hribernik and Tomec 2015). During 2011, Slovenia experienced the second largest GDP decline in the euro area (Damijan 2012). This time, Slovenia had less fiscal space to deal with a recession; the public debt burden had increased from 22% of GDP in 2008 to 47.1% in 2011. Between this and the euro crisis raging in the background, investors were no longer certain that Slovenia had the fiscal ammunition to address its banking problems (Krzan 2014; Heinz and Sun 2014).

This uncertainty caused Slovenia’s five-year sovereign credit default swap (CDS) spread to rapidly climb in 2011 (Heinz and Sun 2014; EC PR 2011). Between March 2009 and June 2012, Slovenia’s CDS spread rose by 230 basis points and the related funding pressures nearly cut the country out of international financial markets (Heinz and Sun 2014; Krzan 2014). In June 2012, Slovenia responded with a second injection of capital into NLB, this time of €381 million, bringing its stake in the company over 75% (NLB 2012 Annual Report). But the measure was not enough to restore market confidence. Slovenian sovereign CDS spreads continued to rise unabated; investors speculated that it “would become the sixth euro-zone country to ask for a bailout” (IMF 2012; Stevis 2012; Heinz and Sun 2014).

The Slovenian government resolved to tackle the credit crunch in the aftermath of NLB’s second capital injection (Sila 2015). In the spring of 2012, the Slovenian Finance Ministry proposed to consolidate all government asset holdings into one entity, including both the bad assets purchased from banks and the existing holdings of government employee pensions (Slovene Press Agency 2012; Slovene Press Agency 2012a; Slovene Press Agency 2012b). Public unions and pensioners quickly protested the risk this might pose to pensions. The OECD Secretariat criticized the proposal for not creating a separate and independent bad bank. It also expressed concern that, under the proposal, the legislature would appoint all nine members of the new organization’s supervisory board (Slovene Press Agency 2012b; OECD 2012). Between July and October 2012, the Slovenian government revised the proposal to include an independent bad bank with a mix of executive and legislative appointees on its board.^FNFor a complete discussion of the political and social context, see Slovene Press Agency 2012; Slovene Press Agency 2012a; Slovene Press Agency 2012b; OECD 2012; Slovene Press Agency 2012c; Slovene Press Agency 2012d; Bardutzky 2016; Slovene Press Agency 2012e; Slovene Press Agency 2012f; Slovene Press Agency 2012g; ECB 2012; Carney 2012; Slovene Press Agency 2012-09-20; Slovene Press Agency 2012i; AFP 2012a; AFP 2012; Brierley 2012; Slovene Press Agency 10-10-2012; Slovene Press Agency 2012l; Slovene Press Agency 2012m; O’Reilly 2012; Heinz and Sun 2014, Slovene Press Agency 2012n; Slovene Press Agency 2012o; Slovene Press Agency 2012p; Slovene Press Agency 2012q; AFP 2012b; Slovene Press Agency 2012r; Slovene Press Agency 2012s; Slovene Press Agency 2012t; Sila 2015; Slovenia NRP 2013; ENP Newswire 2013; Bancni vestnik 63[11].

The legislature passed the Act Defining the Measures of the Republic of Slovenia to Strengthen Bank Stability (ZUKSB) on October 23, 2012, after multiple delays and a veto (ECB 2012; Slovene Press Agency 2012p; Slovene Press Agency 10-10-2012). The Act created the Bank Assets Management Company (BAMC), or “DUTB” in Slovenian. (The legislature created the new Slovenian Sovereign Holding company to hold other government assets in a separate act). The opposition party, in collaboration with trade unions, requested a referendum on the bill, but the Constitutional Court overruled the request because it feared the potential consequences of an IMF bailout for Slovenian sovereignty (Slovene Press Agency 10-10-2012; Slovene Press Agency 2012r; Bardutzky 2016; Slovene Press Agency 2012t).

The ZUKSB came into force on December 28, 2012, and the BAMC was formally established on March 20, 2013 (Sila 2015; Slovenia NRP 2013; BAMC 2014).^FNThe IMF said in a 2012 report that it had provided the government with technical assistance in drafting BAMC’s implementation bylaws to “ensure that the governance structure and the transparency of the BAMC would be in line with internationally accepted standards” (IMF 2012). Facing criticism from international agencies about the BAMC’s enabling legislation, the Ministry of Finance and the Bank of Slovenia (BoS) went to work on a “secondary legislation” for the ZUKSB (ENP Newswire 2013). However, the legislature only passed amendments to ZUKSB in December 2015 (DUTB History).

Under the ZUKSB, the BAMC had two tasks: (1) to recapitalize and privatize banks, and (2) to take over most of those banks’ non-performing loans (NPLs). The BAMC would also aim to centralize claims on and stakes in various debtors to help restructure Slovenia’s corporate sector (EC Staff 2013-04-10). Shortly after its March 30, 2013, launch, the organization’s leadership set a target to begin receiving applications from banks needing government capital by the end of June. The following week, finance ministry and central bank officials gave the BAMC board two more specific tasks with immediate priority: to recapitalize NLB and buy its bad assets by the end of June, and to make a recommendation for the corporate restructuring of Cimos d.d., a large and indebted car parts manufacturer (BAMC 2014).

At the end of May, the finance ministry informed BAMC management that it had changed its mind: the state, not the BAMC, would recapitalize and own banks directly (BAMC 2014). This would allow the BAMC to focus on its asset management and corporate restructuring missions. Its financing would also change: rather than direct financing from the taxpayers, which the recapitalization mission would have required, the BAMC would finance itself through bond issues.

Under the ZUKSB, the BAMC’s mission was three-fold:

1. Minimize the taxpayers’ burden while repaying the BAMC’s bonds by “[r]estructur[ing] and manag[ing] assets the BAMC acquired from the banks to maximize their value” (BAMC 2014a)
2. “promote trust in the financial system and act in line with the highest international standards of corporate governance”
3. “enable and encourage long-term restructuring of the Slovenian economy” (BAMC 2014, 33)

Position Within the Slovenian State/Corporate Structure

Under the ZUKSB, the Slovenian government formed the BAMC as a joint-stock company fully owned by the State. As the owner of the BAMC, the State would be responsible for the BAMC’s liabilities (EUROSTAT 2014). The ZUKSB did not specify how the BAMC would be capitalized or the government’s contributions beyond guarantees of loans and bonds (Bancni vestnik 63[11]). Under the initial ZUKSB framework, the BAMC would establish and manage a special purpose vehicle called the Bank Stability Fund (BSF) that could hold assets (EUROSTAT 2014). The law gave the BAMC the option to use special purpose vehicles to hold assets, but how and when it would use them was subject to administrative discretion (EC Staff 2013-04-10). The BAMC would enjoy a five-year-lifetime (with an expiration date of December 31, 2017), after which the BAMC would wind down and transfer its remaining assets to Slovenian Sovereign Holding (SSH) (IMF 2014; BAMC 2014).

Governance

As a state-owned and controlled company, the BAMC was governed under a one-tier corporate governance system, in which the board of directors also served in management positions. The majority of the board consisted of well-known foreign experts. But the Slovenian government, as the sole shareholder, approved all of its purchases and business plans (IMF 2014; EUROSTAT 2014). This board was composed of seven members: four Ministry of Economy-appointed non-executive directors (who could be politicians) and three “executive directors selected on the basis of a public call for applications” (Havrylchyk 2013).

Both types of directors had relatively broad responsibilities, but there seemed to be some division of labor between the two.^FNAn English translation of the ZUKSB and its secondary legislation before the 2015 amendments (which would provide more detail on the responsibilities of executive and non-executive directors) is not available Executive directors were responsible for drafting the BAMC’s financial plan (Uradni List 2013) and non-executive directors (in collaboration with an Inter-Ministerial Committee) were responsible for assessing bank business strategies (Havrylchyk 2013). One of the executive directors would be responsible for the BAMC’s day-to-day operations (BAMC 2014). Executive directors had to have personal integrity, a university degree, expertise in finance and banking corporate law, and could not hold shares in a bank. Board member remuneration would be decided by the Assembly and not be constrained by the rules governing remuneration of public employees (Havrylchyk 2013). The executive directors would also have a significant role in managing the BAMC, as seen in the organizational chart below (BAMC 2014).

Figure 3: Organizational chart

Participant and Asset Eligibility

The BAMC could purchase a wide array of assets from participating banks, ranging from “standard loans” to “any other assets that may reduce the participating bank’s ability to meet its capital adequacy requirements” (EC 2013-04-10).

The BAMC was originally designed to take on nonperforming assets from three major banks in which the state and various public entities had a majority ownership. Determining whether a bank was eligible to participate in the BAMC, on the other hand, involved two steps. First, the government’s Inter-Ministerial Committee had to establish “that the bank does not have, or will not have within the following 12 months, sufficient capital to meet capital adequacy requirements and, as a result, the stability of the financial system is threatened” (Bancni vestnik 63[11]). Second, each bank had to submit a business plan to convince the government that the bank was adequately capitalized, that it had an adequate liquidity position, that the bank (as well as the bank’s equity holders) would share the costs of recapitalization during the restructuring,^FNAs the BAMC ultimately never conducted recapitalizations, this was probably not relevant to the government (BAMC 2014) and that the bank would implement measures to “prevent or mitigate any possible distortion of competition” (ECB 2013).

Selecting Banks and Assets for Participation

A bank’s participation in the BAMC began when the bank, the Bank of Slovenia, or the BAMC itself submitted an application to the Inter-Ministerial Committee, which consisted of eight members appointed by the Government and the Bank of Slovenia. The application included the bank’s business strategy. Some sources say that submissions from banks or the BoS were required to outline the assets requested for transfer (Havrylchyk 2013; Bancni vestnik 63[11]; Slovene Press Agency 2019-11-04). However, the process for selecting banks for participation and for selecting assets for transfer was “subject to administrative discretion” (EC 2013-04-10). After the banks and assets were selected, the purchase price for the assets (referred to as the “transfer price”) had to be determined. It is not clear from public documents who determined this transfer price and how they did so (BAMC 2014). According to the IMF and OECD, there were two rules governing the transfer price for impaired assets. First, it had to be based on “‘real long-term value,’ following the EC State Aide guidelines” (IMF 2012) and the “real long-term economic value,” following Slovenian law (Havrylchyk 2013). Second, the transfer price could be reduced by up to 3% of the asset value to cover the administrative, financial, and operational costs of the BAMC for managing the assets (EC 2013-04-10).^FNIn practice, the BAMC was left out of the valuation process, as the European “Commission had their experts doing independent valuations of all assets suggested by the banks and the supervisor (the Bank of Slovenia) for transfer to BAMC” (Bancni vestnik 63[11], 107) To finally effect the transaction, the government of Slovenia had to submit a letter to the European Commission’s Directorate-General for Competition (EC DG Comp) with information on the asset transfer, and receive “a positive opinion for State aid from the European Commission,” authorizing the asset transfer (ECB 2013).

At this point, the BAMC would begin taking the approved assets from the approved bank onto its balance sheet. The timeline and logistics for this process were not clear, but the Slovenian government indicated that the “transfer of non-performing bank assets to the BAMC is planned in several packages,” with each package dealing with a different group of assets (Slovenia NRP 2013). The BAMC would pay for these assets by issuing up to €4 billion in state-guaranteed bonds but would have to pay an annual fee between 1.00% and 1.25% for state guarantees (BAMC 2014; BAMC 2018).

Asset Management and Corporate Restructuring Strategies

Once an asset appeared on the BAMC’s balance sheet, the BAMC would then determine how it would manage the asset. The BAMC stated that its strategy depended on the character of the specific asset, but broadly had two different approaches: sale or restructuring. The simpler approach was a sale of the assets to maximize cash returns, typically through the bankruptcy of the borrower or debt collection (BAMC 2014a).^FNThough the BAMC still asserted that they were an “active manager” because they monitored the sale process “either through bankruptcy or enforcement proceedings” (BAMC 2014a, 8-11)

For corporate restructuring, on the other hand, the BAMC took a more active approach, which used a set of “case managers” in direct contact with a corporate debtors’ management to maximize the going-concern value of the companies while seeking a “win-win situation with all important stakeholders in the company.” They would do this by “taking an active and initiative stand in negotiations with other financial and business creditors, especially where the BAMC is the major creditor,” and using several other tools (BAMC 2014a). The tools at the disposal of the case managers included “divestment of non-strategic assets, debt-to-equity conversion, partial debt write-off and reprograming of the remaining sustainable debt, which is determined by expected future cash flows"(BAMC 2014a, 8-11).

This leaves the question of how the BAMC would decide whether they would restructure or sell a given asset. The BAMC decided it would opt for the strategy that would provide “maximal economic value.” It determined this by doing its own valuation of the collateral related to each asset after assessing whether the debtor was still viable as a going concern (BAMC 2014a).^FNUnlike the transfer price, the BAMC’s approach to these valuations is well documented, though the BAMC only outlined it after it began its asset purchases in late 2013 (BAMC 2014a). These valuations also aimed to calculate the “fair value” rather than the “real long-term value” or the “real long-term economic value” (IMF 2012; Havrylchyk 2013).

If the BAMC selected a corporate debtor for restructuring, it had to perform two additional steps: decide the difficulty of the case at hand and distribute BAMC’s human resources accordingly (BAMC 2014a).

Over time, the BAMC could use this valuation procedure to reassess “asset values and ensuing impairments or revaluations in the future” (BAMC 2014a).

Exit Strategy

BAMC’s statute set a target to sell at least ten percent of its holdings every year until its remaining assets were transferred to the SSH at the end of 2017 (IMF 2014; Uradni List 2012). The BAMC preferred to sell loans and relevant collateral to third parties in most cases. However, the BAMC said that it did not intend to sell assets in distress. It reserved the right to “decide to acquire collateral itself in order to avoid fire sales or speculative elements, stabilize asset markets or improve the quality of the collateral through asset management actions” (BAMC 2014).

Transparency, Confidentiality, and Oversight

The Ministry of Finance was both the sole shareholder and supervisor of the BAMC, potentially creating a conflict of interest for the Ministry. The BAMC was also subject to oversight by the Court of Audit and the upper house of Slovenia’s parliament. The official confidentiality policy was that the “BAMC shall disclose to the public all information that is relevant to the company’s operations, as applies to joint stock companies, excluding data which are considered confidential in accordance with the act regulating banking” (IMF 2014; Havrylchyk 2013).

The social context

Slovenian politics became increasingly chaotic between late 2013 and the end of 2014. Popular discontent over fiscal consolidation and corruption forced multiple coalition governments to collapse. The Slovenian public seethed; “more than 90 per cent of the population was dissatisfied with the state of democracy [in 2014], while prior to the crisis, a mere half of the population expressed similar opinion[s].” This trend continued through the rest of 2014, which was characterized by multiple governments falling and delayed elections that together contributed “to delays in policy implementation” (IMF 2015; Piroska and Podvrsic 2019).

Initial implementation and fleshing out the program (February 2013 – June 2013)

The BAMC was incorporated in March 2013. The government of Slovenia appointed four non-executive directors to the BAMC’s board. Those non-executive directors then appointed three temporary executive directors, one of whom was a foreign consultant with extensive experience in the field of asset management (Bancni vestnik 63[11]; BAMC 2014).

Implementing the BAMC posed constant challenges for BAMC staff and the Slovenian government. Shortly after a €3.6 million capital injection from the government, which enabled the BAMC to begin operations, there was a change in government. The BAMC board was not certain of its relationship with this new government, but began outlining an unprecedentedly aggressive rollout for the BAMC. It planned to “be ready to review the first recapitalization applications from banks by the end of June 2013 […] and start the first bank restructuring operations in the fourth quarter of 2013” (BAMC 2014).

However, on April 8, 2013, difficult news came from the new government. BAMC saw its already aggressive timetables shortened because the new government had made an “external political commitment” (to the IMF and EC) to “be ready by 28 June to (i) recapitalize the first bank (NLB) and (ii) start transfers of NPLs and other NPAs from that bank” (BAMC 2014).^FNAs part of these political commitments, the BAMC also had to “design and build the organization of BAMC,” start preparing to acquire or issue new equity as part of its NLB recapitalization, and “develop a recommendation on” the BAMC’s role in restructuring Cimos, a large auto parts maker (BAMC 2014). The BAMC revised its timeline, predicting that it would also “complete the majority of transfers before the end of the third quarter of 2013” (Slovenia NRP 2013). The European Commission was skeptical of this deadline, as it had not yet received the information necessary to approve “the assets to be transferred to the BAMC and corresponding valuations [for each bank][,] […] the public recapitalisation amounts […] [for each bank][,] [and] the restructuring plans of the participating banks” (EC 2013-05-29). Meanwhile, the BAMC privately expressed concerns to the Ministry of Finance that the transfer prices it received for the bank assets “were substantially overvalued,” signaling that more recapitalization would be necessary than previously estimated (BAMC 2014).

Although the BAMC used “substantial consultant resources during April and May” to meet the first commitment (recapitalizing NLB by June 28), it proved to be a moot point.^FNDuring that May, the BAMC made its way into a “National Reform Programme” (NRP), which Slovenia submitted to the European Union. The NRP envisioned the BAMC being used to acquire NPAs from Slovenia’s three largest banks: NLB, NKBM, and Abanka (EC DG Comp 2014). The Ministry of Finance informed the BAMC on May 31 that the government, not the BAMC, would recapitalize the banks. As the BAMC originally had planned for the state to capitalize the BAMC with enough capital to conduct capital injections for the banks, this threw a wrench in the BAMC’s financing plan. The BAMC could rely on the $4 billion in state guarantees to issue bonds, but it had an extremely small equity cushio. Although other AMCs operated with limited equity, the BAMC’s 2013 annual report asserted that “additional equity was needed to provide sufficient solvency” (BAMC 2014).^FNWithin the year, the government realized that this was insufficient, and invested €200 million more in the organization (BAMC Strategy 2016)

Amid this uncertainty, BAMC remained “a complete start up” that had to heavily rely on outside consultants for multiple major workstreams; this trend continued for at least the next year and a half (BAMC 2014; Bancni vestnik 63[11]; BAMC 2015). The organization would not even have a permanent office until mid-May 2013 (BAMC 2014).

Asset Transfers

The BAMC continued working toward the June 28 deadline, with its board going as far as publicly announcing on June 18 that the BAMC would meet the deadline. The organization was unaware that the European Commission’s skepticism was about to translate into concrete action. Later that day, the EC told the BAMC that the EC DG Comp thought “the proposed transfer prices were unrealistically inflated and thus would entail inappropriate—and illegal under EU rules—amount of state aid.” The EC DG Comp threatened to prohibit transfers at the proposed asset prices, which were based on year-old estimates, and “demanded that the valuation process be repeated and scheduled to be ready by the end of July.” This would not be a small delay. EC approval for asset transfers would not come until “September, at the earliest” (BAMC 2014; Bancni vestnik 63[11]). The EC offered approval for some “pilot transfers” in line with the June 28 deadline as consolation but required that they be “based on market prices” rather than “real long-term value.” The BAMC negotiated with NLB to put together some pilot transfers (which the Inter-Ministerial Committee accepted), but the EC ultimately rejected them. The EC argued that even these market price estimates were too high. June 28, 2013, came and went without any BAMC asset transfers (IMF 2012; BAMC 2014).

This rejection triggered further negotiations between BAMC, BoS, the Ministry of Finance, the EC DG Comp, and other stakeholders in the asset transfers throughout July as well as increasing EC DG Comp involvement in BAMC’s operations. The EC DG Comp analyzed a sample of loans and concluded that “transfers would have to await the outcome of an Asset Quality Review (AQR) and Stress-Testing (ST) exercise to be undertaken for the ten largest Slovenian banks” (BAMC 2014). The Slovenian government would hire independent experts, who, in consultation with the EC, would functionally determine which assets the BAMC would purchase, how much the BAMC would pay for them, and how much recapitalization would be required by the government (EIU 2013-11-05). The ECB expected to start rolling out the AQR and ST in 2014 (EIU 2013-06-28), but opted to have Slovenia perform the two exercises in 2013 (EIU 2013-10-07). An article at the time suggested that Slovenia was effectively a “guinea pig” for the AQR and ST (EIU 2013-10-07). The EC and ECB imposed the ST because of “rising uncertainties and the seeming unwillingness” of the government and banks to recognize the size of their losses (Sila 2015).

In response, BAMC indicated that it would likely purchase assets simultaneously from the three largest state-owned banks, NLB, NKBM, and Abanka (BAMC 2014). The BoS later noted that the three banks constituted the Slovenian banks that “had unresolved Bank of Slovenia measures requiring a capital increase even before the beginning of the [AQR and ST][…], and are in the process of having state aid approved.” The BoS expected these banks to transfer the majority of their non-performing assets to the BAMC by the end of the year (Bank of Slovenia 2013).

The transfer, key well-performing loans in groups of companies with substantial NPLs earmarked for transfer to the BAMC.” The latter issue, which policymakers referred to as “cherry-picking,” “would complicate effective company restructuring” and undermine the accuracy of the EC’s AQR. BAMC and BoS agreed to address cherry-picking by requiring banks to transfer exposures to groups of companies to BAMC as a whole, including both performing and non-performing assets (BAMC 2014). However, the BoS apparently did not force banks to comply with this principle when the asset transfers eventually happened (Bancni vestnik 63[11]).

The rest of the summer (as well as the September deadline) went by without much news from the BAMC or the EC beyond the Slovenian government’s announced liquidation of Factor Banka and Probanka, two small private banks, on September 6, 2013 (BAMC 2014; EIU 2013). Papers speculated that Slovenia would keep edging closer to an EU-IMF bailout until the country completed the ST/AQR, capital injections, and asset transfers to the BAMC (EIU 2013-10-07). The Slovenian government had continued preparations in the background. It had formally designated several large banks as eligible for asset transfers to the BAMC, then extended the July 30 deadline for banks to shore up their capital using private money to the end of the year, by which time the AQR/ST would have been completed (EC DG COMP 2013).

The BAMC continued preparing for the asset transfers in autumn. It went on to draft a plan with NLB and NKBM to transfer their assets over a six-month period in a series of transactions grouped into tranches, beginning before the end of 2013 (Bancni vestnik 63[11]). However, in late October, the BAMC learned from the government that the new target date for the transfers would be December 8-9, coinciding with the release of the AQR and ST results (BAMC 2014). This assumed that the EC DG Comp would nearly instantly approve the terms of the first transfer.

As the target date approached, the BAMC encountered a surprise from the BoS and the Ministry of Finance yet again. On December 6, the BAMC was told that the government’s plan for recapitalizing NLB and NKBM by the end of 2013 required “all non-performing assets earmarked for transfer to BAMC to be legally transferred from the two banks to BAMC before Christmas vacations” (Bancni vestnik 63[11]). As it was impossible for the banks to get the necessary documentation and logistics in order to execute such a transfer, the BAMC improvised a solution. The BAMC would take legal possession of the assets as scheduled, but the “the credit files of the loans to be transferred would stay with the banks during a transition period similar to the originally scheduled six-month period” where the banks would act as BAMC’s trustee or asset manager for the relevant loans until the documentation could be transferred. To make this happen, the BAMC would quickly have to draft new contract catalogs and constantly coordinate with the Inter-Ministerial Committee, the BoS, and the Ministry of Finance (BAMC 2014).

The Ministry of Finance and BoS released the AQR and the ST on December 12, 2013. This satisfied the EC DG Comp, so the government went ahead and sent lists to the BAMC enumerating the assets that the BAMC would acquire from NLB and NKBM (and the corresponding prices to be paid) on December 17 (BAMC 2014). The government told BAMC’s management that it “had merely two weeks to finish the transaction” (Nyberg 2014). Meanwhile, the government quietly injected €200 million in equity into the BAMC and the BoS publicized some details of the AQR and the ST as part of a “Full report on the comprehensive review of the banking system” (BAMC 2014; Bank of Slovenia 2013).

The BAMC finally purchased €3.3 billion in assets (book value) from NLB and NKBM on December 20, 2013, with €1.0 billion worth of government-guaranteed BAMC bonds (Bancni vestnik 63[11]; BAMC 2014; Balogh 2018). At the same time, the government injected €3.2 bn (U.S. $4.4bn) of capital into the three state-owned banks (NLB, NKBM, and Abanka Vipa) and the two liquidated private banks (Factor Banka, and Probanka) (EIU 2014). Although the BoS considered Abanka’s situation and size to be comparable to NLB and NKBM (which necessitated major asset transfers to the BAMC), the EC decided to delay asset transfers from Abanka until “final approval” of an EC restructuring program sometime in 2014 (SeeNews 2013; Nyberg 2014). Together, these measures finally started to decrease “the yield demanded on Slovenia’s sovereign debt” (EIU 2014). Interest rates for Slovenian government bonds “immediately fell by more than a percentage point” and Slovenia’s sovereign ratings began to improve as early as February 2014 (BIS 2014; Nyberg 2014).

The IMF’s Mission Chief for Slovenia, Antonio Spilimbergo, complimented Slovenia’s actions, stating “authorities have shown repeatedly, and said repeatedly, that Slovenia can solve the problem by itself” (IMF 2014a). Spilimbergo further speculated “if anything, the most acute phase of the crisis is gone” (IMF 2014a).

The EC, the government, and the Bank of Slovenia also continued working on a viable restructuring plan for Abanka and developing a list of assets that Abanka would eventually transfer to the BAMC (Slovene Press Agency 2013). Aside from delays on the planned real estate asset transfers from NKBM (that the BAMC would later complete in mid-2014 using €11.6 million in cash), the asset transfers appeared to be going smoothly (BAMC 2015). Abanka received a partial recapitalization to hold it over until the government could develop an acceptable restructuring plan and the European Commission could approve a more comprehensive restructuring plan for Slovenia’s third largest bank in early 2014 (FINSAC 2016; EC DG Comp 2014). This capital injection did not aim to cover the 2013-15 capital shortfall outlined in the EC’s ST/AQR for Abanka (EC DG Comp 2014a).

The EC DG Comp and the BAMC picked up their work on restructuring Abanka. However, in mid-February, the EC DG Comp told the Slovenian government that it needed further approval to finish recapitalizing and conducting asset transfers from the troubled bank (EC DG Comp 2014; Bank of Slovenia 2013). The “final approval” did not prove to be so final.

Shortly after the first asset transfers from NLB and NKBM in December 2013, details on the BAMC’s transparency/public information policy began to trickle out through the press. The Slovene Press Agency reported that “The government and the central bank have promised the list of assets for transfer will be made public,” but the information accompanying the lists, according to the BAMC’s director of claims management, Janezom Skrubej, “would not include information that would depress the value of assets” (Slovene Press Agency 2013). This evidently was not enough to appease some civil society groups. Parliament passed amendments to Slovenia’s freedom of information legislation in March, 2014, that would subject the BAMC (as well as a number of other government organizations) to greater public scrutiny (Slovenian Press Agency 2014-03-06).

In this environment, public criticism of the BAMC’s management pertaining to potential conflicts of interest and a lack of transparency intensified. In February 2014, Slovenia’s Commission for the Prevention of Corruption (CPC) began to investigate potential conflicts of interest surrounding BAMC former Executive Director and advisor to the Board Torbjörn Månsson because of his position as a partner at a consultancy paid millions by the BAMC, Quartz co. This consultancy had been paid millions of dollars for services to the BAMC since March 2013, when the BAMC was still a start-up (Slovenian Press Agency 2015-10-06; Premrl 2015).

Pressure from civil society, politicians, and the media continued to ratchet up on the BAMC as the year went on. The early 2014 changes to Slovenia’s freedom of information laws came into effect in April, which revealed that two of the BAMC’s executive directors (one foreign and one Slovenian) were making over €21,000 per month. This was outrageous to a public and domestic media that was used to compensating public servants at a much lower rate. The amended freedom of information laws also increased the public’s information on the December asset transfers—citizens could now see each claim, the associated debtor, and the size of the relevant claim (Slovenian Press Agency 2015-10-06).

Implementing the asset transfer process that began in December became even more complicated. The BAMC had no role in calculating the transfer prices, which were based on the AQR/ST that was overseen by the Bank of Slovenia, the Finance Ministry, the EC, the ECB, and the EBA (Balogh 2017). Although the EC had told the BAMC in December that the EC “had already taken into account financing and management costs when setting the transfer prices,” the BAMC learned from its finance ministry in May 2014 that this was not the case. The BAMC announced that it would now request compensation for financing and management costs from the banks or their owners in accordance with the ZUKSB. The BAMC then went about revaluing the assets, a process it would complete in early July 2014. Unlike the EC’s calculation of the transfer price, the BAMC’s approach to these valuations was well-documented, though the BAMC only outlined them once asset purchases began (BAMC 2014; BAMC 2015).^FNDocumentation problems also made it difficult for the BAMC to determine “whether the transfer prices of transferred assets match the fair value in accordance with IFRS” for its first annual report (BAMC 2014). This also complicated auditing efforts for several months. These valuations aimed to calculate the “fair value” rather than the “real economic value (REV)” calculated by the EC (IMF 2012; Havrylchyk 2013; BAMC History 2015). The European Commission’s Impaired Asset Communication (IAC) defined the REV as being based on “underlying cash flows and broader time horizons” (EC 2009). The fair value, on the other hand, was developed by the BAMC. It entailed using an internal asset valuation methodology based on the value of the underlying assets (like pledged real estate), which was verified by an external auditor (BAMC 2015a). This fair value proved to be much less sympathetic than the EC’s calculations; the revaluation translated into a €39.9 million day-one loss on the BAMC’s balance sheet, reducing BAMC’s equity from €203.6 million to €157.9 million (BAMC 2014; BAMC 2015).

In September, the government drafted the BAMC into the resolution of two banks that were already in receivership: Probanka and Factor Banka (which had both previously enjoyed government guarantees of their liabilities of €490 million and €540 million respectively) (Iwanicz-Drozdowska et al. 2016). Using its own cash reserves, BAMC purchased €114.2 million book value in claims against 30 companies for €28 million from Probanka on September 10. Unlike other asset transfers by the BAMC, the price for this transfer was set by the BAMC rather than the European Commission and the BoS. Two days later, the BAMC purchased claims against 17 companies with a book value of €49.2 million for €10.8 million from Factor Banka, also using its own valuation methodology (BAMC 2015, 24-26).

The European Commission gave its final approval for the Abanka transaction on August 13, 2014. The approval covered a €243 million capital injection and the transfer of €1.1 billion in assets to the BAMC for €423.8 million (or €424.6 million) in state-guaranteed bonds (Slovenian Press Agency 2015-10-06; BAMC 2015; EC DG Comp 2014). It is not clear why it took so long for the Slovenian government to obtain approval for these actions, though we know that the Slovenian government and European Commission were exchanging information on the Abanka restructuring plan from December 18, 2013, to July 29, 2014 (EC DG Comp 2014a). Part of the “final approval” provided for Banka Celje to be merged with Abanka once the Slovenian government acquired a majority stake in Banka Celje (EC DG Comp 2014). As with previous BAMC asset transfers, implementing the transfers was difficult. The transfers began on October 13, 2014, but the BAMC would not complete the Abanka transfers, which ultimately took the form of two tranches of assets, until the end of 2014. The BAMC ended up acquiring €1.1 billion in book value of NPLs from Abanka for €423.8 million (BAMC 2015).

The BAMC soon would face increased pressure from the new coalition government, which had been elected in July and took power in September. On October 29, 2014, the Slovenian government rejected the BAMC’s annual report (although the BAMC would not find this out until November 7) (Slovenian Press Agency 2015-10-06; BAMC 2015). Signaling “the start of a period of increased political involvement at the bad bank” (Slovenian Press Agency 2015-10-06), the government ordered the BAMC to supplement the annual report with more information (BAMC 2015, 24-26). Two weeks later, having realized that some of the non-performing assets the BAMC had purchased from the two liquidated private banks had government guarantees on them, the new government ordered the BAMC to waive “its right to redeem guarantees under the Guarantee Scheme Act (ZJShemRS).” The BAMC would then technically have a claim on the government for the payment of those guaranteed debts. The BAMC also had to return any funds it received from redeeming such guarantees (€2.2 million) to the Slovenian state budget within 15 days of receiving the order. However, the new government did not appear to issue similar orders to the BAMC when it came to the transferred assets of three state-owned banks participating in the BAMC. The BAMC would instead “transfer to the account of the government a proportionate amount of proceeds received upon the repayment of loans for which a bank subject to transfer redeemed a government guarantee prior to the transfer to the BAMC” (BAMC 2015).

Around this time, on November 6, 2014, the CPC (the corruption commission) presented a final report to the BAMC on the BAMC’s operations, which criticized the BAMC for “excessive payments for consultancy services, lack of transparency, and poor corporate governance.” By December the CPC issued recommendations related to this report to the government, which included having the state “tighten oversight, leading to the announcement of an overhaul of pay and governance policies.” In addition to already stated criticisms related to its consulting procurement, the CPC believed that the BAMC’s one-tier governance system was inappropriate, as “a two-tier governance system would contribute to reducing corruption and other risks which the company was exposed to in the course of its operations.” The BAMC countered that it already strengthened its governance practices, but that was not enough to allay suspicions of the organization (Slovenian Press Agency 2015-10-06; BAMC 2015).

The BAMC also began an asset transfer from Banka Celje on December 18, 2014, under which the BAMC received assets with a book value of €411.4 million for €127 million in state-guaranteed bonds. The BAMC completed the physical portion of this single-tranche asset transfer in March 2015 (BAMC 2015). With no upcoming asset transfers, in January, the BAMC decided to begin consolidating the data associated with its portfolio “to a central system managed for the BAMC by Probanka". This process would last until the end of May 2015 (BAMC 2015a).

The Court of Audit followed-up the CPC’s scrutiny of the organization by submitting a report on the legality, efficiency, and cost-effectiveness of BAMC’s operations in 2013 at the end of January 2015, which the BAMC disputed on February 9 (BAMC 2015). The report, which was released to the public (in Slovene) on March 15, 2015, showed “wide-ranging shortcomings” (Slovenian Press Agency 2015-10-06). In the report, the Court of Audit instructed the BAMC to submit evidence that it had improved its internal controls and executive compensation policies within 90 days (BAMC 2015).

The IMF also expressed misgivings about Slovenia’s approach to its bad-debt problem. It noted in February 2015 in its annual Article IV consultation that Slovenia had taken no actions to improve the governance of Slovenia’s banking sector and few actions to facilitate its consolidation. Its report depicted a largely stalled reform process with still-high NPLs and a corporate sector still in need of restructuring. It called for the BAMC to conduct additional transfers to address the former and for the government to use the BAMC as a tool to affect a restructuring of the corporate sector. Perhaps most importantly, it noted that the BAMC’s “independence should be safeguarded” (IMF 2015). The legislature responded to these concerns with the passage in late 2015 of a law amending the ZUKSB. The amendments clarified that the Ministry of Finance cannot “issue instructions to the BAMC for action on individual cases” and that “responsibility for management of the BAMC rests with its executive directors” (IMF 2017). The amendments also granted the BAMC new powers, extended its life until 2022, and raised the possibility of the BAMC taking part in the winding down of failing banks (BAMC Strategy 2016).

Less than a week before the report was released to the public, the government cut the monthly pay of BAMC non-executive directors and executives by half (to €5,000), then replaced three of the four non-executive directors (Slovenian Press Agency 2015-10-06; BAMC 2015).^FNIt is worth noting that the salaries were previously as high as thirteen times the average in Slovenia (EIU 2015). The BAMC responded in late March, 2015, by pursuing an anti-corruption certification program from private anti-bribery and corruption certification agency ETHIC Intelligence, which the BAMC said “was designed to effectively take into account the recommendations of the Court of Auditors and the Commission for Preventing Corruption” (BAMC PR 2015b). In media reports during the summer of 2015, CEO Torbjörn Månsson “said that frequent public criticism of the bad bank was unjustified, since the results show the institution is on course to achieve its goals”. The CEO dismissed complaints about the BAMC’s transparency and potential conflicts of interest, referring to them as “false allegations” (Slovenian Press Agency 2015-08-21). However, the announcement of policy changes and media appearances did not please the various Slovenian government institutions.^FNWith the exception of a proposal that the BAMC (or a new bad bank) be used to tackle the still-large NPLs of Slovenia’s SMEs, the BoS was largely silent on the BAMC during this time (Slovenian Press Agency 2015-09-23). By September 23, 2015, the Court of Audit complained that the BAMC had not brought its compensation guidelines into compliance with “the government guidelines for executive pay in key state-owned companies” within the 90 days (Slovenian Press Agency 2015-10-06). This appeared to be in response to media reports of increased payments to CEO Månsson continuing after the compensation policies had already changed (EIU 2015; Slovenian Press Agency 2015-10-01).

The BAMC attempted to manage the bad press aimed at the compensation of its largely foreign higher-ups. They put forward a press release on September 28 saying that the BAMC amended its compensation policies in April and there were no changes in the policy since that time. It went on to explain that the policy only covered the BAMC’s executive and non-executive directors (including the embattled CEO, Torbjörn Månsson). The press release described increased disbursements related to the CEO as “associated with payroll adjustments according to employment contracts for 2014 and 2015 and to settlement of social contributions” (BAMC PR 2015C). This was evidently not a satisfactory explanation, and the Minister of Finance announced that he would propose the firing of Swedish economist Lars Nyberg as president of the BAMC’s board (Slovenian Press Agency 2015-10-06). The coalition government broadly agreed and sacked Månsson as well as Nyberg, but not before Nyberg submitted a letter “Concerning the remuneration of Mr Månsson [sic]” to the Minister of Finance. In this letter, Nyberg made a case for Månsson’s salary, asserting that the Ministry of Finance “had full information” as to the arrangements with Månsson and the BAMC’s divergence from the new compensation policy came from its contractual obligations to pay for Månsson’s weekly travel back to Sweden (BAMC PR 2015D).               The following day, Nyberg delivered a scathing address to the Slovenian government’s Committee on Financial and Monetary Policy, arguing “the issue of remuneration is not the reason for the government to fire Mr Månsson [sic]—or me, for that matter” (BAMC PR 2015E).

Rather, Nyberg argued that the BAMC “doing too much” when it came to restructuring its assets was at the root of why such pressure was put on the Minister of Finance in the first place. He said the BAMC had taken various decisions that were in the taxpayers’ interest, but in conflict with the interests of ownership and management at the companies (BAMC PR 2015E). The owners and managers, argued Nyberg as well as some members of the opposition, then exerted pressure on the Slovenian government to restrain BAMC (BAMC PR 2015E; Slovenian Press Agency 2015-10-07). Nyberg claimed the Finance Ministry ordered the BAMC to dismiss two foreigners from its board in March 2015. He said the Finance Ministry was trying to intervene in individual BAMC restructurings. Nyberg concluded: “Leaving Slovenia, I will not wish you good luck. I just hope that you know what you are doing” (BAMC PR 2015E).

On October 12, 2015, the Finance Ministry officially filled the two vacant board positions with two Slovenians and released a letter refuting some of Nyberg’s claims (BAMC PR 2015F; BAMC PR 2015G). It explained that public pressures over the pay of the foreign board members “do not allow us to run the institution with the same team in the future” (BAMC PR 2015F). Its letter asserted that the management changes were not politically motivated and that the increased government involvement in individual cases stemmed from its obligations under the “Assets Management Strategy related to state owned enterprises” passed by the Slovenian parliament in July 2015 (BAMC PR 2015F; OdSUKND 2015).

The BAMC did not have any more asset purchases planned (EIU 2015). It would not conduct any more asset transfers between December 2014 and February 19, 2016, when the BAMC absorbed what remained of Factor Banka and Probanka (which were still in liquidation) in a merger ordered by the government (Balogh 2018; BAMC PR 2016).^FNThe BAMC took on a total of €407.9 million in liabilities from these two banks (BAMC Strategy 2019). Unlike its other asset transfers, the merger resulted in the BAMC acquiring staff from the two banks as well as a portfolio of small retail and personal exposures. The BAMC dealt with this problem by resolving to “bundle loans into offers interesting to banks or other investing entities” (BAMC Strategy 2016). The government partially compensated the BAMC for the costs of the merger, injecting €3.1 million in May 2016 and €50 million in December 2016 (BAMC Strategy 2019), with the BAMC booking an €80.4 million loss on its equity (BAMC 2019). Meanwhile, NPLs in the banking sector had continued to decrease, falling as low as 2.5% by the middle of 2018 (IMF 2019; IMF 2017).

Asset Management and Disposition

The BAMC began fleshing out its asset management goals in 2014, when it decided that it would target an 8% return on the equity first invested by the Slovenian government (BAMC 2014; BAMC 2014a; BAMC 2015). The next year, the BAMC, after failing to meet projections for this goal, adjusted the indicator from the expected return on equity to 8% average economic return on equity (EROE) per annum on a cumulative basis and at some point made it mandatory (BAMC 2016; Balogh 2018; BAMC 2019). It reasoned that EROE was preferable because it takes into consideration also the return of capital to the owner, and therefore more appropriately and comprehensively measures BAMC’s performance. From this point, the BAMC consistently exceeded the goal (BAMC 2017; BAMC 2016; BAMC 2018a; BAMC 2019). The BAMC translated the requirement that it sell 10% of its assets each year into a goal of generating cash equivalent to 10% of its assets each year. It did not achieve this goal in 2013 (and evidently was not punished by the government for its failure), but exceeded this goal by a significant margin during every other year it operated (as of 2019) (BAMC 2019; Balogh 2018).

When the BAMC started managing its assets in early 2014, the BAMC focused on asset sales. It used this strategy to generate “two-thirds of its cash flows mainly by selling the ‘family silver’ in large scale transactions” between 2014 and 2015 (BAMC 2017). However, this early asset management and disposition work was subject to intense criticism from the public as well as drawn out, politically sensitive cases in Slovenian bankruptcy courts (BAMC 2015; Slovenian Press Agency 2015-10-06).

In 2016, due to its absorption of Probanka and Factor Banka, it shifted its focus to smaller assets and moved toward managing a more diverse portfolio (BAMC 2017; Balogh 2018). The BAMC began to take a more active role in the companies it was restructuring after the late 2015 amendment to the ZUKSB (which was called ZUKSB-A) took effect in January 2016. (For details of legislative changes see Legal/Regulatory Guidance). These changes allowed the BAMC to lend additional capital to existing debtors, acquire “additional claims towards existing debtors,” and work with banks to refinance restructured debtors (BAMC Strategy 2016). Staffing numbers rapidly climbed between 2014 and 2016, peaking at 144 employees in the aftermath of the 2016 mergers with Probanka and Factor Banka (BAMC 2019 Strategy). (See Figure 1.) In response to the staff increases and the changing shape of the portfolio, the BAMC moved toward devolving more of its decision-making from its Board to more “operational level” parts of the organization. By the end of 2017, the BAMC had a little less than 40% of the assets (in value) that it acquired remaining (Balogh 2018).

In a December 2019 interview, the BAMC’s CEO stated that “as of September [2019], BAMC had cumulatively generated almost €1.7bn of inflows from the management of its assets, representing more than 80% of the initial asset transfer value, with over €750m of assets still to be disposed of.” The CEO went on to say that the BAMC would “provide more than the repayment of the initial investment to the state” (Gillet 2019).

Figure 4: BAMC Permanent Employee Headcount (Actual and Projected)
Source: BAMC 2019 Strategy, 32.

Overall Outcomes

In total, the BAMC paid €1.6 billion to take €4.7 billion in assets off of the balance sheets of six banks (FinSAC 2016). If one looks at the assets for which the BAMC provided state aid, the participating banks took a 71% haircut on the assets they transferred (ECB 2015). By June 2017, the BAMC recovered approximately 68% of the purchase value of its assets (World Bank 2019).

By the end of 2018, the BAMC had repaid €1.28 billion of the €1.97 billion it borrowed. It managed to shrink its bad-asset portfolio to €830.1 million; its remaining assets took the form of state-guaranteed commercial loans (BAMC 2019). (See Figure 4.) The BAMC ended up selling most of its portfolio. The BAMC made €81 million in net profits by 2017, though the Slovenian government made millions more than this amount from the BAMC’s interest payments and guarantee fees (BAMC 2014; Balogh 2018). (See Figure 5).

Figure 5: BAMC’s Remaining Debt as of December 31, 2018
Source: BAMC 2019, 58.

Figure 6: BAMC Returns, 2013-17
Source: Balogh 2018, PDF Page 16.

Although Slovenia avoided an IMF-EU bailout (Piroska and Podvrsic 2019), the Slovenian economy had a largely creditless recovery until a number of years after the economy stabilized (EBRD 2018). Slovenia’s share of corporate NPLs in its banking sector peaked at 28% in 2013 and fell to 5% by 2018. Deleveraging in the corporate sector continued through at least 2018, though the Slovenian banking sector returned to profit in 2015. The BAMC and the government’s various recapitalizations weighed on the public debt to GDP ratio, which peaked at 83% in 2015, but this did not appear to jeopardize the state’s credit rating (Balogh 2018).