(Adds details of planned sale, company and industry background) LONDON/ATHENS, Nov 20 (Reuters) - Greece’s Alpha Bank has selected U.S. investment fund Davidson Kempner as its preferred bidder to buy a $12 billion portfolio of nonperforming loans in what will be the country’s largest ever sale of bad debt, sources told Reuters. The portfolio, known as Galaxy Project and worth 10.8 billion euros ($12.81 billion), also includes the disposal of Alpha’s bad loan servicing unit, Cepal. Davidson Kempner has valued the assets at about 290 million euros, trumping a rival offer by U.S. investment giant Pacific Investment Management Company (PIMCO), one of the sources said. Alpha Bank declined to comment while Davidson Kempner and PIMCO were not immediately available. The sale, which is expected to be finalised by the end of 2020, is the most significant attempt by a Greek bank to clean up its balance sheet amid fears that loans to businesses and individuals going bad will surge as a consequence of the COVID-19 crisis. Banks offload bad debts, normally at a fraction of their face value, to free up their balance sheets to make new loans and keep both their own business and economies going. The sale of the Galaxy portfolio is expected to reduce Alpha’s nonperforming exposure (NPE) ratio to 24% from around 43% and its nonperforming loan (NPL) ratio down to 13% from 30%, a banking source familiar with the deal said. Alpha launched the process early this year, drawing initial interest from a series of bidders including Italian firms Cerved and Credito Fondiario, the sources said. But only Davidson Kempner and PIMCO made it to the final stages of the auction, with Alpha’s board selecting Davidson Kempner as its preferred bidder after a board meeting on Friday. The decision, which could be announced early next week, follows a similar transaction by Greece’s Eurobank to sell 80% of its loan servicing unit FPS to Italian debt recovery firm doValue along with a chunk of mezzanine and junior notes from a 7.5 billion euro bad loan securitization known as Project Cairo. ($1 = 0.8435 euro) (Reporting by Pamela Barbaglia in London and George Georgiopoulos in Athens Editing by Diane Craft and Matthew Lewis)