Tag: accounting circular

Sareb To Invest €45M In RE Asset Appraisals

18 January 2016 – El Economista

Sareb, also known as the “bad bank” has set aside €45 million to spend between now and 2018 on the appraisal and revaluation of all of the real estate assets that it owns, in accordance with the new accounting legislation issued by the Bank of Spain.

The President of Sareb, Jaime Echeogyen (pictured above), has said, in an interview with Idealista News, that the entity had appraised 60% of its registered properties by the end of 2015.

Echegoyen, who will celebrate his one year anniversary at the helm of Sareb in February after he replaced Belén Romana, said that 40% of the remaining properties will be valued by “cloning the results that have already been obtained on the basis of similar properties located in the same area”.

In this way, Sareb will comply with the Bank of Spain’s accounting legislation, which establishes up to three methods for estimating possible corrections to the value of these properties in order to ensure that they reflect market price.

According to the legislation, Sareb must value at least 50% of the assets it has acquired that are still on its balance sheet at year-end 2015 and all of them by 31 December 2016.

Echegoyen is optimistic about the (expected) performance of the real estate market this year and believes that the entity is now starting a “second phase”, in which it will consolidate the sale of its assets as well as recover loans from borrowers.

“We think that 2016 is going to be a very positive year, but we must do things in a calm fashion”, said Echegoyen after highlighting that the entity’s work over the last three years has involved classifying and valuing almost 200,000 assets, of which around half were homes, land, commercial premises, industrial warehouses and hotels.

The objective of Sareb’s President is to find buyers for those developments that were left unfinished and those that have been finished but have been left empty and he asserts that it is still too soon to talk about demolition.

Moreover, he has faith in the four agencies (Altamira, Haya, Servihabitat and Solvia), which are responsible for managing the portfolio sale of Sareb’s homes.

Echegoyen thinks that “there is a lot of interest in land” and he says that “in the current environment, it is likely that many savers will invest in a home to rent it out”.

In this sense, he indicates Sareb’s goals in the social sphere, which include: to provide commercial premises to self-employed people and entrepreneurs at “reasonable rents” and to offer land that does not have development potential “for the cultivation of allotments in exchange for a rustic farm income”.

Original story: El Economista

Translation: Carmel Drake

Sareb’s Sales To Large Investors Were 75% Below Budget In 2015

14 January 2016 – Expansión

Sareb’s sale of assets to large investors slowed during the second half of 2015. The company, which owns the majority of the problem assets that were formerly held by the rescued entities, transferred just €520 million worth of assets to institutional investors in 2015, which represents a quarter of the amount (€2,200 million) it had put on the market in portfolios (prior to the new accounting circular).

The reason for this slow down was the introduction of new accounting requirements, designed by the Bank of Spain, which entered into force last year. These regulations penalise Sareb’s previous business model, which sought to increase revenues during the last few months of each year through the sale of portfolios to large investors. From now on, the company will not transfer large loan packages, but instead will sell its loans one by one in large competitive processes.

Putting the brakes on

This paradigm shift will be felt in the bad bank’s annual results. In 2013, the first full year of activity for the company led by Jaime Echegoyen (pictured above), Sareb generated revenues of €1,166 million through the wholesale channel – €757 million from portfolio sales and €409 million from the sale of individual positions-. One year later, that volume remained stable, with sales of €1,115 million, of which €708 million were closed in December. In 2015, the figure has been reduced to almost half, just over €600 million in total, given that the entity made sales of €90 million during the first half of the year and €520 million during the second half.

This slow down has two effects: one positive and one negative. The good news is that Sareb will preserve its margin on the deals it makes with large investors. That is because it used to obtain lower prices on its portfolio sales than on its sales through the retail channel, and so, in this way, margin was sacrificed at the expense of volume.

The bad news is that annual revenues will be lower than initially expected. Sareb is under pressure to liquidate all of its assets before the end of 2027. At the end of the first half of 2015, it still had €43,381 million assets left on its books, having reduced the initial asset balance transferred to it from Spain’s rescued entities (€50,781 million) by just €7,400 million.

Its inability to sell large portfolios is due to the fact that the accounting circular designed by the regulator obliges Sareb to perform an individual appraisal of all of its assets, within two years. This environment damages portfolios sales, because instead of being able to assign a global price for each portfolio, it will now be forced to set a specific price for each property or loan, reducing its margin.

Sources at some of the international funds indicate that they had expected the volume of sales through the wholesale channel to be lower than the actual figure obtained (€520 million). They point out that Sareb only had a few weeks to adapt its strategy and sell the loans included in five portfolios that it had already put up for sale, amounting to €2,200 million, on a loan by loan basis. All of the sales made through the wholesale channel (€520 million) involved loans and the majority were secured by land or residential assets.

A difficult year

The slowdown in wholesale sales has come at a difficult time for the entity. Its revenues from the retail channel also slowed in 2015, due to the transfer of assets to the new managers –Haya RE, Altamira, Solvia and Servihabitat–. In addition, the company is going to have to recognise significant provisions and the corresponding charges in the 2015 accounts to reflect the new accounting circular. All of this means that the entity will have to consume more of its share capital and some of its subordinated debt.

Thankfully, the company is making savings in terms of its financing costs – its debt is becoming cheaper – which should enable it to partly offset that blow.

Original story: Expansión (by J. Zuloaga)

Translation: Carmel Drake

Sareb Modifies Its Loan Portfolio Sales Policy

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.

Clean up

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

Echegoyen Confirms That Sareb Will Have To Convert Debt

20 October 2015 – Expansión

The President of Sareb also announced that the entity will increase the number of social housing properties (from 2,000) to 4,000.

Yesterday, at a meeting of the Senate’s Finance Committee, the President of Sareb, Jaime Echegoyen, discussed the recent developments to affect the so-called ‘bad bank’, which announced its results for the first half of the year last Friday, reporting a reduction in losses of 23%.

Echegoyen confirmed that the application of the new accounting standards, defined by the Bank of Spain’s Circular published in September, will affect the solvency of Sareb. The new standards require Sareb to assign an individual market value to each one of the entity’s assets, with the consequent need for new provisions. However, the President confirmed that the group’s convertible subordinated debt, amounting to €3,600 million, will be more than sufficient to cover this eventual hole in its solvency.

The senior executive of Sareb also acknowledged that the hiring of third parties to manage the asset portfolio slowed down sales processes during the first half of the year, due to the complexity and length of time involved in the process to materially transfer the management of those assets. Nevertheless, he appeared confident that the cruising speed of sales will be recovered again during the second half of the year.

During the first half of the year, revenues decreased by 10%.

When questioned by several senators about the hedging swap contracted by Sareb in 2013, Echegoyen explained that this contract would mature in 2022. Until then, all profits and losses associated with it are “theoretical”, since the actual result will only be known upon maturity. Nevertheless, the banker commented that during the first half of the year, the contract generated theoretical gains of €400 million.

Social housing

Echegoyen also used his appearance to announce that Sareb has increased its stock of social housing available to autonomous regions from 2,000 to 4,000 homes. That means that the bad bank is making available an additional 2,000 homes to the regional administrations.

Currently, Sareb has collaboration agreements in place in Cataluña, Aragón, Galica, País Vasco and the Balearic Islands and is waiting to sign two more in the Canary Islands and Castilla y León. The President added that the entity is also in advanced talks with Castilla La Mancha, Valencia, Cantabria and Madrid and he announced that discussions have also begun in Andalucía, Asturias and Extremadura.

Original story: Expansión (by M.R.)

Translation: Carmel Drake

Sareb To Review Business Plan & Adapt It To New Situation

19 October 2015 – Expansión

The President accepts that the entity’s initial calculations were too optimistic.

Not only do Sareb‘s managers have to review the appraisal values of half of their assets in record time before the end of the year, they also need to update the company’s business plan, which has been affected by the recent publication of the new accounting circular. The exact impact is not known yet but all indications show that the forecast cumulative annual yield of c.14% has been made obsolete and impossible to achieve. The first provisional calculations clearly indicate that the yield is in the single digits.

Sareb must revalue half of its assets before the endof the year year and revalue the other half during 2016, in accordance with the accounting circular drafted by the Bank of Spain, which came into force just a few weeks ago. This means that (since any losses that arise from valuations that are lower than the look value cannot be offset by latent profits already recorded) provisions will have to be recognised, which will cause the company to recognise significant losses, which will result in the virtual disappearance of the scarce capital available to the bank bad, given that it also recorded losses in the last two years amounting to almost €900 million.

The thing is, not only will it have to capitalise part of the subordinated debt that the shareholders issued to restore the balance sheet, it is also going to have to review the company’s business plan, once again, and adapt it to the new situation. And according to the early drafts, it seems like they are going to finally acknowledge that the figures that were initially approved bear little resemblance to the current reality.

“From the beginning we thought that the money that we were investing in Sareb was not going to yield a profit and that, at best, we would perhaps recover the initial outlay”, said one of the main private shareholders in the company recently. The initial business plan, which was verified by KPMG, forecast an annual return on capital of 15% throughout the 15-year life of the company. Subsequently, that figure was reduced to 14% and after the first year, when Belén Romana was still President, the objective was reviewed again – sources said that the yield would fall below 14%, but they did not specify by how much.

Change of scenery

Sareb now has a different President, Jaime Echegoyen, and a different set of accounting obligations that are significantly pushing back the time when the company will generate positive returns. But based on the preliminary calculations, the yield will be well below its initial double-digit forecast (…).

The new accounting circular has been accepted by Sareb without any public criticism, although according to sources close to the company’s Board, the discussions behind the scenes between the managers of Sareb and the Bank of Spain have been heated. One of the major clashes relates to the fact that the supervisor applies banking accounting criteria to the entity, when in reality according to the sources, the company is really just a large real estate company. (…).

The other main discrepancy centres around the imposition of the requirement to perform new appraisals of certain assets… “The initial lack of control was such that the same assets coming from different entities…were transferred to Sareb with different values”. (…).

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake

Project Macarena: Sareb Sells 1,300 Homes & 30 Plots

16 October 2015 – Expansión

The company has put up for sale one of the at least three portfolio that it plans to sell before the end of the year.

Sareb has officially started its busiest season of the year. The company, led by Jamie Echegoyen, has now begun to put large asset portfolios on the market, aimed at overseas funds. It hopes to increase its annual sales as a result. According to financial sources, over the last few days, the entity has distributed information about Project Macarena, a portfolio comprising debt amounting to €410 million, which is secured by residential assets.

The portfolio has been divided into three tranches: the higher quality debt tranche, which is backed by 810 homes – including 11 complete developments – and 2 plots of land; one unpaid debt balance, which has 450 home as collateral; and overdue credits, with 29 plots of land as guarantees, located primarily in Madrid, Tarragona, Barcelona and Málaga.

Aside from the land, the majority of the portfolio is located in Madrid, which accounts for 24.5% of the portfolio’s nominal value; Barcelona (21.4%); and Málaga (16.3%). The sale is being advised on the financial side by Irea and on the legal side by Ashurst. According to the information distributed to investors, this project offers “a potential upside resulting from the macroeconomic improvement and in particular, the current recovery in the Spanish residential market”.

According to financial sources, this portfolio has been designed specifically for the large overseas funds operating in Spain, since it contains residential properties only and the assets are clustered together in a handful of areas – this makes the portfolio more manageable for these investors.

In the case of the unpaid loans, Sareb reports in the sales brochure that around 70% of them are already in the process of asset foreclosure or debt recovery. Meanwhile, the tranche of higher quality credits is secured by homes with an occupancy rate of 95%, which increases the chance of recovering the debt.

Other portfolios

In addition to Project Macarena, Sareb has two other portfolios ready to launch, which it will bring onto the market very soon: one contains debt from a few property developers, worth €600 million; and the other contains credits backed by tertiary sector assets – hotels, offices, retail premises and logistics sites – amounting to €200 million. And the entity has not ruled out the possibility of launching further operations before the end of the year.

These three portfolios join two others that were launched over the summer. The first, at the hand of Sareb’s asset manager Haya Real Estate. That was Project Silk, advised by N+1, whose portfolio comprises €1,000 million of overdue loans to small property developers. The second was Project Vega, through which the company hopes to get rid of €180 million of debt, backed by land.

If Sareb manages to complete the sales of these five portfolios only, then it will reduce its balance sheet by €2,400 million between now and the end of the year. These operations are even more important in 2015, given the slowdown experienced in the retail sales channel, caused by the migration of assets to new managers: Haya, Altamira, Solvia and Servihabitat.

Sareb also needs to strengthen the top half of its accounts to be in a better position to deal with the provisions that it is going to have to recognise following the new accounting circular, approved two weeks ago. And all of this, with the aim of continuing to repay debt -€3,000 million in 2015 – which Echegoyen has committed to and which is key to enabling it to reduce the financial costs of the company.

Original story: Expansión (by J. Zuloaga)

Translation: Carmel Drake

Sareb Will Have To Capitalize More Debt To Avoid Bankruptcy

5 October 2015 – Expansión

On Friday, the Bank of Spain published an accounting circular that Sareb will be obliged to comply with this year. The company responsible for managing the real estate assets inherited from the banks that received public aid, acknowledged immediately that it will have to recognise new provisions. This means that the company will record losses once again. Furthermore, it is very likely that, as a result, Sareb will have to covert some of its subordinated debt into capital to prevent it from being wound up.

Sareb is coming to the end of its third year and is not scheduled to be wound up until it is 15 years old. However, during its first two years, it recorded total losses of more than €800 million, which reduced its initial capital from €1,200 million to just less than €400 million.

Now, the accounting circular, drafted by the Bank of Spain, is requiring that Sareb value all of its asset this year and next. This will involve a considerable effort by the company, which clearly separates out all of its assets. Sareb’s balance sheet comprises 100,000 own properties, 400,000 collaterals as guarantees and 70,000 loans.

The cost of (re)valuing the whole portfolio is estimated at €25 million until 2017, which would clearly have an impact on total costs.

The properties owned by Sareb should not represent a significant problem because the company is familiar with them, and has pretty good idea of their approximate market values. They even think that overall, their owned properties could generate some gains, although any such gains would not appear on the balance sheet.

The problem exists when it comes to valuing the loans and collateral guarantees that support them, because Sareb does not control or know those assets in as much detail. The general view is that valuing those assets at current prices will result in significant losses, which would be reflected directly in the income statement given that provisions would be required.

For this reason, and based on information from the experts at the company, a statement was made to the Board of Directors, formed by representatives of the Frob, which owns 45% of Sareb, and by representatives of the private (owner) banks, which own the remaining 55% majority stake, that it is certain that Sareb will register losses once again this year and may therefore need to convert some of its subordinated debt (subscribed by the shareholders in the same proportion to their capital stakes) into capital to rebuild the financial position of the company.

Sareb has subordinated debt amounting to €3,600 million, a much higher figure than it would have to convert (into capital) to solve the problem posed by the circular, without having to resort to a possible capital increase.

Although officially, the heads of Sareb have not communicated a specific figure to the Board in terms of the size of the losses for the year, sources at the bad bank are talking about provisions of no less than €500 million.

This year, Sareb is selling fewer properties to individuals than it did last year, for various reasons, including because the management of certain assets has been transferred from the ceding banks to specialist companies, which won the tender held earlier in the year.

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake