Sareb’s Investors Will Lose 30% Of Their Investment

7 April 2017 – Expansión

Sareb, the bad bank that took over most of the toxic real estate assets from the banks intervened by the State through the Frob, announced a substantial modification to its business plan last week. The change represents an acknowledgement of the fact that, at the end of the entity’s life, in 2027, its shareholders will have lost 30% of their initial investment, almost €1,440 million. As such, the shareholders are going to have to recognise provisions for that impairment this year.

The creation of Sareb (which began operating in 2013) was conducted after the State received European aid to clean up the domestic financial system. It was not possible before because the Treasury did not have sufficient funds to do launch the initiative alone.

In an attempt to ensure that the State’s contribution would not add to the public deficit, a procedure was carried out whereby the private banking sector, insurance companies and some real estate companies contributed most of the necessary own funds (55%) and the Frob contributed the remaining 45%. This meant that in total, €4,800 million was contributed, €1,200 million in the form of capital and €3,600 million in the form of subordinated debt, convertible into capital, which would receive a relatively high remuneration if the company were to generate profits.

Sareb obtained the other resources required to pay for the real estate assets acquired from the banks in difficulty, by issuing debt over one, two and three years, which the entities from which the assets had been acquired were obliged to subscribe to and which is now being renewed for equal periods as it matures, but in reducing amount thanks to Sareb’s ability to generate funds to repay it.

All of the private banks, with the exception of BBVA, answered the call of the economic authorities and invested on the basis of their size. Santander put €805 million in the pot; CaixaBank, €581 million; Sabadell, €321 million; Popular, €276 million, and Kutxabank, €122 million. The other entities contributed smaller but no less representative amounts, based on their size.

Initially, the business plan forecast that the entity would become profitable after five years and it was stated that the company would generate an annual return of 14% over the course of its 15-year life. (…).

When the President of the entity, Belén Romana, was replaced by Jaime Echegoyen, that long-term business plan was modified to try to bring it closer to the reality of the problem assets whose orderly exit is complicated and whose profit generating ability is pretty much impossible.

The Ministry of Economy decided that the supervisor of Sareb’s accounts should be the Bank of Spain because the assets had come from financial institutions and because a large part of them were essentially problem loans. The supervisor established some very strict accounting standards regarding provisions (…), which forced the bad bank to register losses from its first year onwards, which reduced the level of capital subscribed by the shareholders by the same proportion. (…).

The evolution of the market and of Sareb itself have meant that, again, a revised business plan is being prepared to reflect the latest reality, which, according to the statement made to shareholders last week, not only completely abandons the plans for Sareb’s owners to obtain any returns from the risk they have borne, but also recognises that the total liquidation of the assets will result in losses of around 30% on the capital and debt invested. In other words, the investors will recover €3,360 million at most and will certainly lose €1,440 million. The Frob stands to lose the most: almost €650 million.

Most, if not all of those who invested in Sareb understood that they were providing a service to the country and that obtaining any returns was very unlikely and that there may be losses at the end of the process. Losses that they would recognise when the time came.

But the situation has now changed. This latest announcement means (….) that the shareholders have no choice but to recognise provisions for the losses announced this year. That means a new effort for the banks, some of which are already very stretched in terms of their provisions for this year.

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake