Sareb To Convert €2,400M Of Its Debt Into Capital

3 March 2016 – Expansión

Last week, Sareb’s board examined the draft annual accounts for 2015 and the new draft business plan that is being prepared to reflect the new accounting circular introduced by the Bank of Spain. At the meeting, the Directors also received the bad news that at least €2,400 million of Sareb’s subordinated debt will have to be converted into capital, to cover the losses incurred last year and to restore the net asset balance.

It was already known that the entry into force of the Bank of Spain’s accounting circular was going to cause significant problems for Sareb’s accounts and, consequently, the accounts of its shareholders (the Frob is the main shareholder of the bad bank, along with the majority of the banks that did not require public help back in the day), which have been forecasting that they will have to recognise additional provisions in their accounts for last year to mitigate those effects.

The problem is that as the process to put a market value on Sareb’s assets moves forward, the situation actually gets worse. And every time the Board meets to analyse the situation, that situation has inevitably got worse. The Board of Sareb expects to definitively approve the accounts for 2015 at its meeting at the end of the month and it will then present them publicly.

Recapitalisation

For the time being, the latest thing that the members of the Board know is that the company will have to make an effort in terms of its provisions, which are expected to amount to more than €2,200 million, as a result of the entry into force of the accounting circular, which means that it will have to recognise even higher losses than previously thought last year. And in the absence of sufficient capital to offset those losses, the entity is going to have to proceed to convert a substantial part of the subordinated debt that it issued when it was created, into new capital. That debt was acquired by around thirty entities, including the Frob and the main domestic banks, with the exception of BBVA, which refused to become a shareholder of Sareb or to finance it.

At the end of 2014, Sareb’s share capital amounted to €354 million, compared with the initial balance of €1,200 million, because by then it had already had to absorb the losses relating to the three years that had passed since its constitution in 2012. That capital was sufficient for the bad bank to avoid liquidation during 2015 (…).

But with the requirements of the new circular, which obliges Sareb to value at least half of its assets at market prices in 2015 and the other half in 2016, and with the limited revenues that the company has generated over the last year, the situation is becoming unsustainable from the point of view of its equity balance. For this reason, the management team announced last summer that it was very likely that it would have to resort to the conversion of some of its issued subordinated debt balance (€3,600 million in total) into capital, to restore this balance.

Using the data that the management team currently has available, the Board of Directors has been informed that at least €2,400 million of that subordinated debt balance will be needed to offset the losses for the year and for there to be a sufficient level of capital on the balance sheet.

Since the company has not yet re-appraised all of its assets (note, it has re-appraised more than the 50% required as a minimum by the Bank of Spain for the first year), it is quite likely that when 2016 comes to an end and in light of the likely operating results, Sareb will have to convert yet more debt into equity to restore the balance of its accounts. (…).

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake

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