14 October 2016 – El Confidencial
According to sources close to the operation, the supervisor has refused to allow the accounting deconsolidation of this vehicle in which the bank was planning to group together the majority of its real estate assets, given that the solution would not transfer the risk outside of the group and the provisioning level (33% of the gross value of the assets) is insufficient for such an operation. As a result, the entity chaired by Ángel Ron will have to assess alternative options.
Popular’s bad bank project seeks to remove €6,000 million in gross real estate assets from Popular’s balance sheet (initially that figure was going to be €7,500 million, but the worst assets were removed from the portfolio in the hope that approval would more likely be obtained) with the aim of freeing up capital, an operation that the bank regards as critical if it is to meet the objectives it promised investors when it completed its capital increase in June.
But, as things now stand, Project Sunrise may now only be carved out from the bank at the individual level and not from the consolidated group, which is ultimately what matters to the ECB in terms of solvency. Similarly, the carve out would not stop the calendar of provisions for foreclosed properties, with the consequent cost for the bank. A spokesperson for the entity highlighted that the project has not yet been formally presented to the Bank of Spain. Popular’s share price fell by 7% during morning trading to €1.02/share, a new historically low value.
There are basically two obstacles standing in the way of the full carve-out, according to sources. The first is that Banco Popular would be the main financer of its bad bank, which will have share capital equivalent to just 13% of its assets, and it may have to continue as the shareholder. The supervisor governed by Luis Linde has refused to grant permission to other banks in similar circumstances for the deconsolidation of this type of vehicle, and so authorisation in the case of Popular would represent an unfair situation for its competitors.
The second is that the provisioning level is very low, currently equivalent to just 33% of the gross value of its assets (which means that their net value amounts to €4,000 million), when the market requires a minimum of 50% for these kinds of assets, which are basically low quality Spanish properties. This is justified because Popular expects to see price rises of up to 14.2% with respect to their current value in its most positive scenario, but the market considers that this forecast is too optimistic. All of this means that there will not be sufficient investors willing to buy this structure to allow Popular to reduce its stake below 51%.
The only solution: recognise more provisions
Given this blockade, Ron is exploring other alternatives, such as listing the vehicle on the stock market and gifting its capital to the bank’s current shareholders in the form of a dividend. But that solution is far from optimal because it means that the financing risk would remain inside the Popular group and because it would need to place more than 51% of the share capital by means of this gift. Besides, the entity would have to assume the cost, which is the present value of the future cash flows that it expects to obtain from the sale of these assets.
According to some banking experts, the only solution that may save Project Sunrise would be a sizeable increase in its provisions, which would reduce the net book value of the bad bank and facilitate the generation of profits from the sale of its properties. Only this measure would allow Popular to obtain sufficient demand from investors to place a significant percentage of the share capital and to obtain financing from outside of the bank. But that would mean significantly increasing the €4,700 million provisioning level that it announced when it completed its capital increase, which would in turn cause its losses to soar.
“We are not going to give away the money we raised during the capital increase”
Moreover, this measure goes against the philosophy under which Popular undertook its capital increase and clean-up: “We are not going to give away the money we raised during the capital increase to buyers of the vehicle, we are not going to use the funds that our shareholders have given us to reduce the transfer price and whereby allow other parties to make money from our assets”, explained a source at the entity.
And so, Popular is facing a situation in which it is going to be very difficult to find solutions that are satisfactory for it and at the same time keep the Bank of Spain happy. The problem is that time is running out and the market – which has serious doubts over its capacity to fulfil its promises this time after it failed to do so following its previous capital increase – is not going to extend the period for it to complete its feasibility plan beyond the first quarter of 2017. And it is not just the market, some of the Board members, led by the Mexican Del Valle family, have already made an attempt to replace Ron and have even started talks with other banks regarding a possible merger.
“The managers at the bank are very clear that everything is at stake over the next six months: if they do not fulfil their objectives in terms of provisions, restructuring, the sale of the bad bank, etc., then they know they will be done for”, concludes one of the sources consulted. And the segregation of Sunrise is the key to fulfilling these goals”.
Original story: El Confidencial (by E. Segovia and J. A. Navas)
Translation: Carmel Drake