Santander & Blackstone Hold Onto the Real Estate Company GAC40

18 May 2018 – Voz Pópuli

Project Quasar Investment, the company created by Santander and Blackstone to bring together Banco Popular’s real estate assets worth €30 billion, has absorbed the company ‘Gestión de Activos Castellana 40’ (GAC40), whose debt amounting to €220 million Popular forgave on 30 December 2014, a move that caught the attention of the European Central Bank.

According to sources familiar with the operation, GAC40 filed for creditor pre-bankruptcy after it found itself in the cause of dissolution, but that measure was cancelled after the formal agreement was reached to transfer Popular’s assets to Project Quasar Investment in March. Sources consulted describe the operation as a “bargain”, given that Santander and Blackstone have effectively acquired GAC40’s assets at a discount of almost 69% and without the burdens that was weighing it down.

The Hispania Buildings in the centres of Murcia and Alicante are just two of the assets owned by GAC40. The company also owns the following shopping centres: La Fuensanta in Móstoles (Madrid); Juan de Borbón (Murcia); and Hispania, in Orihuela. Moreover, it has one supermarket in Totana (Murcia) and another one in Vinarós (Castellón), as well as a hotel in Cartagena. Although most of the properties are occupied, the mortgage charges that had been hanging over them since the real estate boom meant that their sale was unfeasible, according to the sources consulted.

The properties form part of Grupo Hispania, which the businessman Trinitario Casanova, the same person who agreed the sale of Edificio España in Madrid to the Riu group last year, sold in 2008 to José Ramón Carabante – the former shareholder of real estate companies from the boom and the founder of the only Spanish team to have operated in the Formula 1 arena, Hispania – for €650 million.

Carabante abandoned the management of Grupo Hispania in 2011 and was replaced by José Fernando Martínez Blanco, an expert in the liquidation and restructuring of companies. According to the sources consulted, Martínez Blanco was appointed by Banco Popular to acquire Carabante’s companies.

Martínez Blanco changed the registered name of the companies acquired from Carabante to ‘Gestión de Activos Castellana 40’ (GAC40) in 2012. The firm was weighed down by a debt amounting to €562.5 million, with Banco Popular as the main creditor. Until the absorption of GAC40 by Santander and Blackstone, Martínez Blanco had continued as the administrator of the company.

Forgive and refinance

GAC40 has remained active all these years thanks to financial support from Popular, which has been forgiving and refinancing the company’s debt year after year.

On 30 December 2014, Banco Popular’s Board of Directors decided to waive GAC40’s debt. That decision caught the attention of the European Central Bank, which conducted an inspection and identified “deficiencies” in the authorisation of the operation, as this newspaper reported.

The most recent refinancing of GAC40’s debt happened a month after the intervention of Banco Popular and its sale to Santander. On 6 July 2017, the company agreed “as the primary financial creditor”, to “convert the debt into a participation loan amounting to €19.4 million”.

With that debt conversion agreed just a month after Popular’s intervention, GAC40 was able to correct the critical situation that it found itself in. According to the company’s accounts for 2016, to which this newspaper has had access through Insight View, the company was in cause of dissolution with a negative goodwill balance of €221 million and financial debt of almost €250 million.

Original story: Voz Pópuli (by Alberto Ortín)

Translation: Carmel Drake

Sareb Unlikely To Distribute Any Profits To Its Shareholders

30 December 2016 – Expansión

Accounting circular / The Ministry of Finance has softened its demands on Sareb. In exchange, the bad bank’s owners, namely, the State and Spain’s largest banks, will not receive anything for their investments in the bad bank, for at least the next few years.

The Ministry of Finance has softened the situation facing the shareholders of Sareb (the most important of which is the State, through the Frob), by not forcing it to recognise latent losses in its income statement, like it has been obliged to do until now. In exchange, the Ministry has shut down the possibility that these shareholders will receive any results from their investment, even if the company does manage to generate profits at some point.

The harsh situation created by the accounting circular that the Bank of Spain designed for Sareb has barely lasted a year. According to that legislation, Sareb was obliged, within a period of two years, to reappraise all of the assets on its balance sheet (which proceeded from the real estate portfolios of the former savings banks that received public aid) and recognise the latent losses in the income statement each year, given that the price at which it bought those assets was significantly higher than their market prices.

The reality of all of this was seen last year when, in order to avoid near bankruptcy, the bad bank reduced its capital to zero and converted a substantial part of its subordinated debt (€2,171 million) into capital, to offset some of the losses for the year and restore the equity balance. Sareb recognised provisions amounting to €3,900 million in 2015 and recorded capital of €953 million (2% of the balance sheet) and subordinated debt of €1,429 million.

It was expected that something similar would happen this year, although with a less intense effect, given that most of the assets were reappraised in 2015, and that the capital balance would again be reduced and more subordinated debt would be converted into capital.

But to avoid this, the Ministry of Finance has made two significant changes. The first is that Sareb must continue valuing its assets at market prices, but if those values result in the creation of latent losses, then rather than recognise them in the income statement, they should be recorded in the equity statement, whereby reducing the company’s share capital. In parallel, and to avoid the company having to file for insolvency due to an excessive reduction of its capital, Sareb may also benefit from the exception afforded to real estate companies at the height of the crisis, which exempted them from having to comply with a certain relationship between the value of their assets and their own funds. (…).

Two conditions

In exchange for these concessions, which will undoubtedly give Sareb some much needed breathing room, the new legislation from the Ministry of Finance establishes two conditions. The first is that when an asset is sold for below its acquisition price, the real loss must be recognised in the income statement; and the second is that if Sareb generates profits in the future, then whilst the equity account exists in which the latent losses are being reflected, then all of the profits earned must be applied to that account. That means that, in all likelihood, Sareb’s shareholders (…) will not receive anything for their investments in the company over the next few years. And it is reasonable to think that they will never receive anything, given Sareb’s asset composition.

This is the first time that this fact has ever been acknowledged, more or less explicitly. (…).

Original story: Expansión (by Salvador Arancibia)

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

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