ALBKY Alpha Services and Holdings SA (PK)

ATHENS—KKR & Co. has signed an agreement with two of Greece's leading banks to manage up to €1.2 billion ($1.35 billion) of their problem loans, the latest effort by the struggling Greek banking sector to restructure bad debts festering on their balance sheets.

The U.S.-based private equity group said in a statement it will help manage underperforming assets owned by Alpha Bank and Eurobank, Greece's third and fourth largest lenders respectively, via its platform, known as Pillarstone.

Pillarstone, which was launched in Italy last year, is also evaluating opportunities to expand the platform in other European countries in the near-term, KKR said.

Greek banks have been reticent to sell nonperforming loans directly to private equity groups. Greek bank executives argue that many of the large corporate loans simply need to be restructured and should not be sold off at a loss to third parties. The KKR platform offers a way round that problem, effectively tasking the private equity group with restructuring loans. The banks and KKR will provide capital. Once they are performing again, they can be returned to the Greek banks' balance sheets.

"The new platform in Greece will provide fresh long-term capital and operational expertise to large Greek corporate borrowers, helping them stabilize, recover and grow for the benefit of all stakeholders," it said in a statement.

More loans from Greek banks may be added to the portfolio of loans to be managed by this joint effort amid a push from local lenders to improve the management of underperforming loans. Greek banks will share in any gains brought on by Pillarstone as they wrestle with a massive pile of nonperforming assets amounting to nearly one in two loans, or about €100 billion.

KKR has already rolled out a similar system in Italy. Three banks, Banca Carige, Intesa Sanpaolo SpA and UniCredit SpA are already using the platform. KKR had previously tried to do a similar deal with Piraeus, Greece's largest bank, back in 2014, but the deal collapsed.

Greece is stumbling through its seventh year of an economic slump that has wiped more than a quarter of its economic output and sent unemployment levels to around 25%.

The new asset-management company is being set up as part of reforms to the sector passed by Greek lawmakers late last year that allow for more efficient management of delayed loans. The European Bank for Reconstruction and Development is considering co-investing in partnership with KKR and the banks, the lenders added.

Write to Stelios Bouras at stelios.bouras@wsj.com and Max Colchester at max.colchester@wsj.com

(END) Dow Jones Newswires

May 17, 2016 06:55 ET (10:55 GMT)

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