4 January 2016 – Expansión
The accounting circular prepared by the Bank of Spain has modified the provisioning criteria that Sareb has tried to follow until now and will also force it to modify its business practices in a segment that has been generating significant income for the entity, namely, the sale of large-loan portfolios, which it used to perform at year end and which is now being replaced by individual auctions.
Sareb used to close its year ends with a volume of activity that allowed it to fulfil the objectives established in the budget each year, by completing the sale of various asset portfolios, in particular loan portfolios, during the fourth quarter of the year. This option has been radically altered following the publication and entry into force of the accounting circular that governs the bad bank.
In the circular, the supervisor established the obligation to appraise all of Sareb’s assets (at market value) within two years (i.e. by the end of 2016), to enable the new asset values to be recorded on the balance sheet. This means leaving behind the global valuation approach and moving towards knowing the individual values of each one of the assets. Sareb ended last year (2015) having appraised 60% of its assets.
Under the previous method, Sareb was able to create asset portfolios and determine their initial asking prices by approximating their values based on the amounts initially paid to acquire them. That meant that some of the values were lower than market price and others were higher, but that Sareb’s managers were able to establish overall asking prices for their portfolios that allowed them to generate margins to cover the company’s general costs.
But by appraising the assets one by one, this compensation (margin) is no longer possible and now Sareb has to try to beat the market in each one of its transactions, which is difficult and even more so in the current climate, in which operations are happening again but no significant price increases have been registered yet.
For this reason, even though, at the beginning of the autumn, the company led by Jaime Echegoyen (pictured above) said that several loan portfolios had been created, for sale before the end of the year, those sales have not actually gone ahead, because, on the one hand, certain elements are still being removed from these portfolios so that they do not distort any possible sale, and on the other hand, individual loan auctions are being planned, which will make any sales much more difficult because the auction process takes so much longer. (…).
These new asset valuations are going to force Sareb to make sizeable provisions for the negative difference compared with the loan purchase prices, which means that the bad bank is going to record significant losses once again, which means that it will have to convert some of the convertible debt that its shareholders subscribed to in order to restore the company’s equity situation. The final amount of the debt to capital transformation will not be confirmed until the re-appraisal process has been completed.
Original story: Expansión (by Salvador Arancibia)
Translation: Carmel Drake