80% Of Popular’s Bad Bank Will Comprise Finished Homes

24 October 2016 – El Confidencial

The first details are emerging about Project Sunrise, the bad bank in which Banco Popular is planning to segregate properties amounting to €5,800 million (gross) (€4,000 million net). Approximately 80% of its assets will be finished homes, which the entity hopes will reduce the risk associated with the project and facilitate sales of the vehicle, according to financial sources close to the project. As a result, the entity chaired by Ángel Ron hopes to reach “break even” in its third year of life, in other words, in 2019, and to generate profits thereafter.

According to the plans for the aforementioned bad bank, more than €3,000 million of Sunrise’s balance sheet will correspond to finished homes, whereas only around €400 million will relate to land – the second most important asset. In third place, the bad bank will hold developments in progress with a gross value of €300 million and finally, Popular will transfer homes for rent amounting to another €200 million. It total, more than 40,000 individual assets will be transferred to the new entity.

The bank is looking to increase the quality of the assets that it transfers to this vehicle and whereby achieve a dual objective: on the one hand, improve its prospects for sales and revenues, given that finished homes have more appeal in the market (when compared to land or developments in progress, which require additional investment to be completed); on the other hand, allow lower provisions to be recognised upon transfer, given that the prices at which the assets were awarded to the bank do not need to be reduced by as much in these cases. The average provisioning level of Sunrise’s assets will amount to 31%.

Profits from year 3 onwards

And it is precisely thanks to this greater ease to sell the bad bank’s assets that Popular expects that the new vehicle will emerge from losses during its third year of operation, in other words, in 2019 (it plans to list on the stock market in 2017). Sunrise’s business plan forecasts profits of around €50 million per year for the next two years, according to sources consulted.

To this end, the bank chaired by Ron is relying on a strong performance in the Spanish real estate market, based on good economic forecasts, low interest rates and improvements in other indicators, which are already being seen in some cases, such as the number of mortgages, the volume of house transactions and the prices of operations. According to their calculations, house prices are still undervalued and as a result, will continue to rise over the next few years.

The bad bank, vital for achieving its objectives

The segregation of the bad bank is one of the fundamental milestones in the restructuring plan that Popular presented to justify its €2,500 million capital increase in June, given that, by removing almost €6,000 million (gross) in real estate assets from Popular’s balance sheet, the entity will free up capital and strengthen its solvency levels. Nevertheless, it has faced difficulties due to the lack of buyers interested in the vehicle, and so it has decided to list the vehicle on the stock market by gifting its share capital to the banks current shareholders in the form of a dividend. (…).

Original story: El Confidencial (by E. Segovia and J. A. Navas)

Translation: Carmel Drake

116