Santander & Sabadell Need To Recognise c. €400M in Provisions to Cover Sareb’s Losses

2 July 2018 – El Confidencial

The bad bank is continuing to generate problems for the Spanish financial sector. Both for the State, due to the stake held by the Spanish Fund for Orderly Banking Restructuring (FROB), and for the large banks, which own 55% of the entity’s share capital. In this way, the deterioration of the Company for the Management of Assets Proceeding from the Bank Restructuring (Sareb) is going to have repercussions for the banks, which will need to recognise additional provisions worth €402 million.

Specifically, the company chaired by Jaime Echegoyen (pictured above) has updated its business model to reflect forecast losses of 73% of the initial investment, which amounted to €4.8 billion in 2012 split between share capital (€1.2 billion) and subordinated debt (€3.6 billion). “It has performed a reality check, so now we know the figures that we have to stick to”, said one banking executive.

The entities most affected by these revised forecasts are Santander, following its incorporation of Popular, which now owns 22.22% of Sareb; CaixaBank with 12.24%; and Sabadell with 6.61%. Nevertheless, “the impact ought to be very limited, given that “the banks already have provisions to cover the majority of those losses”, explains Nuria Álvarez, analyst at Renta 4, in a note from the bank analysing Sareb’s revised business plan.

Banco Santander has a €1.07 billion exposure to Sareb, although it has now provisioned 50% of that figure, and so it needs additional provisions amounting to €246 million, according to calculations by JP Morgan. The analysts reduce the impact to less than 2% of the profits of the group chaired by Ana Botín.

Impact for Sabadell

The other entity that stands out in this sense is Sabadell, which, according to the US bank, has an exposure amounting to €323 million with current provisioning levels covering 29%, divided between €228 million in share capital and €95 million in subordinated debt. Therefore, according to these calculations, Banco Sabadell needs to recognise additional provisions amounting to €142 million.

The third bank with provisioning needs is CaixaBank, on the basis of these estimates, although they are somewhat residual. The bank chaired by Jordi Gual has an exposure amounting to €593 million, but with a 70% provision, meaning that its shortfall amounts to just €18 million. Meanwhile, Bankinter and Bankia do not have any provisioning needs, according to JP Morgan, and BBVA did not participate in the creation of Sareb.

The bad bank was created in 2012 to assist with the digestion of toxic property in the financial sector. Under the then presidency of Belén Romana, who has recently joined Santander’s Board ahead of the upcoming departure of Rodrigo Echenique, the entity promised profits to the banks to attract capital. The deadline for the completion of Sareb’s work is 2027, the year for which the revised business plan forecasts losses with respect to the initial investment.

Original story: El Confidencial (by Óscar Giménez)

Translation: Carmel Drake

Sareb Unlikely to Acheive Any Of Its Goals For First 5 Years

29 December 2015 – Economía Digital

Sareb, the bank that was formerly chaired by Belén Romana and which, following her resignation, is now led by Jaime Echegoyen (pictured above, centre), is about to close its third year of activity. And it is doing so with a great deal of uncertainty over whether it will be able to fulfil the four main objectives it set itself in 2012.

Those objectives were: to reduce its balance sheet by 44% by December 2017; to repay 49.9% of its €50,781 million ordinary debt by that date; to have sold 45,000 homes, also by that date; and to guarantee shareholder returns of between 13% and 14%.

Unrealistic goals

The majority of its shareholders, even initially, did not expect to receive such high returns. But it seems like the other objectives are not going to be easy to acheive either, above all the main one: to repay €25,000 million of its debt within the next two years, half of which it paid out to acquire its 197,500 assets (more than 107,000 real estate assets and almost 91,000 financial assets).

Despite the work performed over the last three years, and having repaid €8,500 million of the €50,781 million that it must return to the savings banks that transferred those assets, it is a long way from achieving the objective set out for the company’s first five years of operation. To repay half of its ordinary debt between 2016 and 2017, it must fork out around €16,000 million.

Untenable position with increasing interest rates

And all of this is happening in an enviable situation in terms of interest rates, which meant that Sareb was able to reduce its financing costs, by lowering the spread on the renewal of its bonds, at the end of the first half of the year and will do so again at the end of 2015. In the event of an increase in interest rates, which will happen, sooner or later, the situation will automatically worsen.

The first step that Sareb must take to be able to repay half of its debt by the end of 2017 involves reducing its balance sheet by 44%. So far, as at June 2015, it had reduced its assets by just 14%. And then only thanks to the good performance of the financial assets, which decreased by more than €7,000 million, given that, by contrast, the value of its real estate assets has barely changed from the initial balance of €11,357 million.

Minimal reduction in assets

That lack of variation in terms of the value of its real estate assets is due to the fact that the sales that have been made fall well short of the 45,000 house sales forecast between 2013 and 2017, and because the foreclosure of property developer mortgages have ended up increasing the number of properties on the bad bank’s balance sheet.

At the end of 2015, Sareb still owns more than 90,000 of the 107,000 real estate assets that were transferred to it when it was first created, in February 2013, despite numerous campaigns launched in December by both the bad bank and by the servicers entrusted with the sale of these assets.

New accounting circular

And as if that were not enough, the Bank of Spain published a new accounting circular earlier this year. It was both expected and feared by Sareb, and it obliges the bad bank to individually value its assets at market prices, compared with the criteria used when they were transferred, which involved average discounts by asset type.

In theory, the accounting impact of the measure is not expected to alter the revenues streams and, if, as expected, new provisions are required, then they will be drawn from the conversion into capital of the amounts required from the €3,600 million subordinated debt in issue and subscribed to by around thirty investors. Those investors include the State, through the FROB, which is the main shareholder, with €1,652 million, followed by all of the main banks, with the exception of BBVA.

Original story: Economía Digital (by Juan Carlos Martínez)

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

Sareb’s Financing Costs Will Be €400m Lower In 2015

19 February 2015 – Expansión

Good news for Sareb. The company has not yet published its accounts for 2014, since it is still waiting for the Bank of Spain to define its accounting framework and whereby determine its final results. But the company, chaired by Jaime Echegoyen (pictured), has taken an important step that will help to improve its results in 2015, its third year of operation.

The bad bank has just renewed the debt that it raised to pay the rescued savings banks for the properties and developer loans that they transferred. Instead of cash, Bankia, Novagalicia (now Abanca), Catalunya Banc, Banco de Valencia, BMN, Liberbank, Banco Caja Tres and Ceiss received senior bonds backed by the State.

The bonds, whose interest rate is linked to 3-month Euribor and the spread on Spanish debt, had maturity dates of one, two and three years and are renewed automatically. The debt relating to the entities classified in the so-called Group 1 (the larger ones) was renewed in December and now (in February) it has been the turn of the Group 2 entities.

Thanks to improved market conditions, in particular, the decrease in the risk premium on Spanish treasury bonds, Sareb has significantly reduced the yield on these senior bonds to the extent that the average spread on its debt portfolio has fallen from 1.954% to 0.832%.

In this way, Sareb will reduce its financing costs by €400 million in 2015, according to the institution’s official calculations. In other words, with the renewal of this debt, the former savings banks will no longer receive this amount for the real estate assets they transferred to the bad bank, which will have a negative impact on their net interest income this year.

The decrease in the interest payments on this debt would have been even greater without the coverage that Sareb contracted over 85% of the portfolio through a swap, which establishes a fixed interest rate regardless of the evolution of Euribor. In this way, it protects its results from upwards movements in the base rate, but it also mitigates the positive effects of any downwards movements.

Repayment of €5,416 million

Sareb’s financing costs have also been reduced by the repayment of debt. The bad bank issued €50,781 million in bonds when it was created to pay the savings banks for their assets. Since then, thanks to the income generated from the sale of properties and loans, it has repaid €5,416 million of that balance.

The amount of debt repaid in 2014 exceeded the initial expectations of €3,000 million by more than €400 million. And Sareb expects that it will exceed its bond repayment forecasts this year as well, although it has not yet shared these forecasts with the market.

“Sareb is fulfilling its main objective, which is to manage and sell its portfolio of assets without generating higher costs for the taxpayer”, said the Chairman of the bad bank in the first ordinary meeting held by the Board of Directors in 2015.

His predecessor in the role, Belén Romana, used to repeat the mantra that reducing its own financing costs was one of Sareb’s priorities to pave the way towards sustainable profitability. Its financing costs amounted to €1,272 million in 2013 and decreased to €1,135 million in 2014. In all likelihood, this downwards trend will only accelerate from here on in.

Original story: Expansión (by Alicia Crespo)

Translation: Carmel Drake

Sareb Recorded Turnover Of €5,000m In 2014

29 January 2015 – Cinco Días

Echegoyen strengthens his team with a man from Barclays

Jaime Echegoyen has made his debut as the Chairman of Sareb, following the surprise resignation of Belén Romana on Monday, by analysing the entity’s provisional accounts for 2014.

In a meeting on Wednesday, the Board of Directors estimated that Sareb will close the year will total revenues of €5,000 million and an EBITDA of €1,000 million.

The final figures will be subject to a ruling by the Bank of Spain, which has not yet published the definitive accounting regulations that will govern the bad bank’s results; it is expected to require that an extraordinary provision be applied to the company’s accounts.

Sareb’s turnover in 2014, as valued by the company itself in a statement, exceeded the amount recorded in 2013 by almost one third. This, says the company “shows the capacity” that it has “both to generate resources through the management and sale of its assets, as well as to assume the commitments of debt cancelation”.

Based on last year’s accounts, Sareb will have repaid €3,416 million of the debt issued to acquire its portfolio, i.e. more than the €3,000 million initially envisaged, of which €2,916 million has already been paid; the remainder will be paid in February. Moreover, the company has made interest payments amounting to €1,135 million on that debt.

Once this process has been completed, Sareb will have repaid €5,416 million of its debt, which has the backing of the state, in just two years.

“Sareb is fulfilling its main objective, which is to manage and sell its portfolio without generating higher costs for the taxpayer”, explained Jaime Echegoyen at the first ordinary meeting held by Sareb’s Board in 2015.

Almost €1,000 million of the total revenues related to the sale of 13 wholesale portfolios, primarily to international investors.

“Although we do not yet know the accounting framework that will be applied to our results in 2014, we can say that the company has achieved the objectives that were set for it last year, and has deepened its strategy for the generation of greater value from the portfolio”, said Echegoyen. “We have a highly skilled workforce that this year has managed more than 10,700 proposals from developers for example; furthermore, the gradual entry into operation of the new contracted servicers will allow us to improve efficiency and provide an increased commercial focus”, he added.

Echegoyen’s first appointment

In parallel, Sareb’s Board of Directors approved a proposal to strengthen its management team, which has lost six members, including Romana, in the last 14 months (in addition, three directors have been replaced).

Juan Ramón Dios Rial will now join as the company’s Director of Recoveries and Restructuring. He comes from Barclays, where Echegoyen was previously CEO.

According to Sareb, Juan Ramón has extensive experience in the management of risk and the restructuring of debt relating to the real estate business. The new director will take over the role currently held by Enrique Saiz, who will continue to collaborate with the company.

Original story: Cinco Días

Translation: Carmel Drake

Sareb’s Board To Meet Today To Review Its Annual Accounts

28 January 2015 – Expansión

The meeting of Sareb’s supervisory body will be chaired by Jaime Echegoyen for the first time today. He is expected to explain the key aspects of the company’s  strategy for the year ahead

Jaime Echegoyen will chair the meeting of Sareb’s Board of Directors today following his appointment to replace Belén Romana at the helm. The meeting has been in the diary for a while, since it is an ordinary meeting, and one of the items on the agenda is the review of last year’s annual accounts, which cannot be closed yet, in the absence of the official Accounting Circular. The Circular should establish, amongst other things, the review criteria for the valuation of the bad bank’s assets and the provision requirement for the possible impairment of the company’s balance sheet. Prior to the Board meeting, the Audit Committee and Appointments Committee will both hold meetings, as always.

The members of the Board will conduct a preliminary analysis of the year end accounts, although the company has until 31 March to approve them. Sources close to Sareb indicate that the company’s activity during the course of 2014 met with the objectives set out in its strategic plan, thanks mainly to a boost in sales to individuals, but also due to the sale of a few property portfolios to large investors, especially during the latter part of the year. As a result, the company’s gross operating profit (EBITDA) was significant. During the first half of the year, Sareb recorded EBITDA of €429 million.

The problem with finalising the accounts at the profit/loss level is that the criteria for the provisions to be applied is not yet known and since the State Council has not yet ruled on the Circular, it is not known whether the Bank of Spain will again impose the requirement to provide for a specific portfolio of assets, as a preventative measure.

In 2013, it ruled that the portfolio of participatory credits should be cleaned up, which resulted in Sareb recording a loss of €269 million.

The new Chairman is expected to share his views about certain key issues with the Board, including whether he will appoint a new CEO or return to the initial structure of an Executive Chairman and one (or more) Director Generals. It seems, at least initially, that he will opt for the former option. He is also expected to inform the Board about the progress of the transfer of information about the assets that new managers will administer going forwards. Currently, there is a transitional regime in place, whereby the ceding companies continue to manage the assets.

Furthermore, Echegoyen must decide whether Sareb will continue to focus on individual sales, as it has done to date, which generate more revenue, or whether it will focus on the sale of portfolios (something that was mainly done at the end of last year to balance the budget) in order to accelerate divestments during the course of the year. All of this will form part of the strategic plan to be developed.

Original story: Expansión (by S. Arancibia and J.Zuloaga)

Translation: Carmel Drake

Romana Resigns As Chairwoman Of Sareb And Is Replaced By Echegoyen

27 January 2015 – Expansión

The Chairwoman of Sareb (the so-called ‘bad bank’), Belén Romana, voluntarily resigned from her post on Monday and the number two at the company, Jaime Echegoyen, the current CEO, has taken over as the Chairman of the entity.

Echegoyen was appointed on Monday by unanimous vote at an extraordinary meeting of the Board of Directors.

The Board considers that Echegoyen “is the right person to lead Sareb through this new phase, given his capacity for leadership, his experience and his professional and human qualities”.

Meanwhile, the body said that it regrets the personal decision taken by Belén Romana and highlighted the excellent job she has done as the head of the company. “Without her dedication, vision and leadership, it is hard to imagine how a few simple paragraphs in the BOE would have been transformed into the robust business reality that Sareb has become today”, it said.

The company recalls that in the two years since its creation, Sareb has fulfilled the initial objectives that the Chairwoman set out and has contributed “significantly” to the restructuring of the financial sector, the reactivation of the real estate market and the change in perceptions of international investors about the Spanish economy.

“Sareb has evolved from being a project agreed with the international authorities in the context of the clean-up of the banking sector, to become a fully operational company, which has generated turnover of almost €9,000 million during the period”, it added.

Furthermore, since Romana has been in office, Sareb has sold nearly 24,000 properties and has repaid 11% of its initial debt. “All of this has resulted in a saving of €7,400 million for taxpayers”, highlights the note.

New phase

Sareb will now be led by Echegoyen and “will collaborate with professional service-minded managing agents that have a strong alignment with the company’s interests. All of this will allow it to take full advantage of the incipient recovery in the Spanish real estate sector”, the company explained in a statement.

The new Chairman also thanked the board for the confidence it has placed in him: “I am fully committed to the new responsibilities I am taking on and am convinced that Sareb will continue to fulfil its mandate, as it has been doing to date”, he said.

Echegoyen, who has extensive experience in the financial sector, was appointed CEO of Sareb in February 2014. Under his leadership, the company has adopted a new organisational structure and has chosen new operators to manage its portfolio over the next few years. Before joining Sareb, he was CEO of Bankinter and Head of Barclays in Spain and Portugal.

Original story: Expansión

Translation: Carmel Drake

Sareb Sells 11 Plots Of Land In Madrid For €64.3m

21 January 2015 – El Economista

The land has capacity for 420 homes, an office building and a shopping centre

The Asset Management Company for Bank Restructurings (Sareb) has reached an agreement with CP Amenabar for the sale of 11 plots of land, for residential and commercial use, in Arroyo del Fresno (Madrid) for €64.3 million.

This agreement will allow CP Amenabar – a consortium formed by the property developer CP Grupo and the company Construcciones Amenabar – to build 420 homes, both subsidised and unsubsidised, as well as an office block and a shopping centre.

The sale in Arroyo del Fresno joins the list of plot-related transactions undertaken in recent months. Last year, Sareb awarded 190,000 square metres of land, which included the Crossover project, for more than €100 million.

A few days ago, the company chaired by Belén Romana (pictured above) closed the transaction involving the Aneto portfolio, a portfolio of loans secured by homes and plots of land prepared for the construction of buildings. The Head of Transactions at Sareb, Luis Martin Guirado, said “This transaction forms part of a strategy to create value from Sareb through the preparation of land for its development”. “The sale of these plots is a just another symptom of the improvement we are observing in the real estate market”, he said.

According to the company, this improvement allowed it to exceed the commercial objectives set in 2014. During the last few weeks of the year, the company closed wholesale transactions amounting to more than €1,000 million.

Original story: El Economista

Translation: Carmel Drake