30 January 2018 – El Independiente
Bankia, BBVA and Abanca are at war with Sareb. The three entities are not willing to sacrifice their own results just because the bonds issued by the ‘bad bank’, which they received as payment for the real estate assets that they transferred to it, are now generating a negative return when, according to the conditions established, the coupon should not have been allowed to fall below 0%.
The conflict is in the middle of an arbitration process to determine whether the banks will be forced to accept that Sareb has decided to change the price of those bonds, explain sources familiar with the negotiations, speaking to El Independiente. The affected entities accuse “Sareb of a breach of contract”.
Sareb was created to take on 200,000 financial and real estate assets from the banks in exchange for which it issued €50.781 billion in 1-, 2- and 3-year bonds, which are renewed each time they mature. The interest rate on those bonds comprises two variable components: the 3-month euribor rate – which is currently trading at -0.32% – and the Treasury interest rate over the term in question. On the secondary market, that interest rate currently amounts to -0.43%, -0.21% and 0.03% for one, two and three years, respectively.
Of the €50.781 billion issued, Bankia granted the company assets worth €22.317 billion, Catalunya Bank – now absorbed by BBVA – contributed €6.708 billion and Novagalicia – which now belongs to the Venezuelan group Abanca – just over €5.0 billion.
Officially, the bonds were issued with a coupon that included a floor clause to prevent the interest rate from being negative depending on the conditions in the market. That floor had its own raison d’etre: so that the securities could be used by the entities to approach the ECB to request liquidity, given that, until last year, the bonds had to trade with positive coupons in order to be discounted by the central bank.
Nevertheless, a regulatory change in the middle of 2017 means that the banks can now use this debt as collateral even when those coupons are negative. This argument is enabling Sareb to refuse to maintain the floor clause that kept the coupons at 0%. And Bankia, BBVA and Abanca are not willing to assume that cost.
An executive familiar with the conflict explains it like this: “Sareb agreed that, in exchange for the real estate assets that the banks transferred to it at the end of 2012, it would pay them a specific amount, not in cash but in bonds. Now it says that it is going to pay less and so, naturally, the banks need to defend their interests and those of their shareholders”.
Of the more than €50 billion in Sareb bonds issued to pay for the 200,000 real estate assets – 80% in loans and credits to property developers and 20% in properties – which nine entities transferred to it, the outstanding balance now amounts to €37.9 billion. In this way, the company has repaid almost €13 billion. Moreover, it has also paid interest on that debt of almost €2.8 billion.
Original story: El Independiente (by Ana Antón and Pablo García)
Translation: Carmel Drake