Moody’s: Banks Still Exposed To High Volume Of Foreclosed Assets

12 May 2015 – Expansión

The US ratings agency Moody’s warned yesterday that Spanish banks still have a lot of foreclosed real estate assets (on their balance sheets), which are continuing to put pressure on the real estate market and are weighing down on the credit profile of the financial sector.

In its weekly report, published yesterday, Moody’s explained that with the exception of the transfers that some entities have made to the Asset Management Company for Bank Restructurings (Sareb), the stock of foreclosed properties on the balance sheets of Spanish banks has increased steadily since the start of the financial crisis in 2008. “The (volume of) foreclosed assets is increasing even though the health of the Spanish economy and its banks has started to improve”, said Alberto Postigo, Senior Analyst at Moody’s.

In his opinion, the banks are avoiding selling assets at losses and are waiting for the market conditions to improve significantly. “Although the Spanish real estate market experienced a slight improvement last year, with a 22% increase in the number of homes sold compared with the previous year, and property prices have now stabilised following several years of decreases, the recovery is not yet sufficiently strong to reduce the stock”, adds the expert.

Main factors

According to the Moody’s analyst, a variety of factors still persist, which are weighing down on the recovery of the real estate sector. These include high unemployment, a shrinking population and a huge stock of empty homes that the market is slowly absorbing.

Finally, the agency has points out that the exposure of Spanish banks to real estate assets, which include properties, as well as secured loans granted to construction and real estate companies, amounts to approximately €300,000 million. Real estate assets amounted to €83,400 million in total in 2014.

 Original story: Expansión

Translation: Carmel Drake

Amendment To Insolvency Law Creates “Bonkers Rule”

24 April 2015 – Expansión

The latest amendment to the Spanish Insolvency Act (Royal Decree-Law 11/2014, dated 5 September) has totally changed the rules of the game for investors in distressed debt.

Although it has gone relatively unnoticed amongst other novelties that have grabbed the attention of scholars (such the new cram-down majorities or the special provisions in the transmission of business units), the new rule to calculate the value of securities over the assets of insolvent companies is of great importance for the debt business.

Pursuant to this new rule, securities (basically mortgages and pledges) will no longer cover the initially agreed amounts in insolvency proceedings in those cases in which the receiver’s report had not been issued when the reform entered into force. The “privileged credit” is now capped at the (current) fair value of the collaterals, reduced by 10% to cover foreclosure expenses, minus the amount of any higher-ranking debt.

The new rule, without clear precedents in the main jurisdictions of our legal environment, has been received in some cases with suspicion and in others with shock by top foreign firms with ambitious investment projects in distressed debt. Especially by private equity funds and investment banks having set their sights on portfolios of secured debt owned by financial entities that need to “clean up” their balance sheets and reduce their exposure to the real estate sector (eg. Sareb); transactions that generally have a strong insolvency component. It is also a disincentive for the players of the incipient “direct lending” industry, the most genuine expression of the “shadow banking” phenomenon. These players are thus pushed to request additional guarantees or higher interest rates for refinancing (in a sector with a high cost of capital per se). With financial models ready and binding offers filed, such last-minute surprises are not welcome by potential new lenders. Certain City executives have baptized the amendment as the “bonkers rule” (“regla de locos”), and expressed their wishes for the Government to stop moving the goalposts during the game. As Ignacio Tirado ironized in Expansión (“Trotski y la reforma concursal”, 13 November 2014), it looks like there is a Trotskyist hiding among the Government’s ranks, because of the “permanent revolution” theory being applied to the Insolvency Act.

Leaving the pure economics and irony aside, it is shocking from a legal standpoint that a cornerstone of real estate law such as mortgage liability (with Registry publicity versus third parties) loses all effectiveness upon the filing for insolvency. We are aware that Insolvency Law is a law of exception, which requires a balancing of interests, but we do not believe that choking half a dozen basic tenets of mortgage law for the sake of the utopian “par conditio creditorum” principle (“all creditors should be treated equal”) contributes to enhance payment to creditors, or the continuity of the debtors’ business. On the contrary, it impairs the legitimate expectations of creditors to protect their claims, it contravenes the basic rules of legal certainty (Article 9.3 of the Spanish Constitution) and creates instability by giving rise to interpretative and transitory right issues.

The constant amendments to the Insolvency Law (two on average per year from its entry into force on 1 September 2004), including material changes such as the one we have analyzed, give an image of a fluctuating legal system, always a step behind economic reality, driven by the unchanged and stubborn percentage of companies that end in liquidation. No one has thought that the key could be to facilitate their recapitalization; not to put spokes in the wheels of investors.

Royal Decree-Law 11/2014, together with the so-called “second opportunity law”; RDL 1/2015, are being processed as new draft bills (“proyectos de ley”), so they are subject to new amendments. Maybe it would be a good idea to listen to the market and that legal certainty prevails over a questionable “insolvency justice”. Especially when two core objectives for economic recovery are at stake: attracting foreign capital and cleaning up banks’ balance sheets.

Original story: Expansión (by Antonio García García)

Translation: Dentons

Barceló’s Profits Soar By 86% In 2014 To Reach €46.4M

23 April 2015 – Expansión

Barceló’s results are improving thanks to the economic recovery. The tourism group closed 2014 with turnover of €2,056.6 million, up 6.2% from a year earlier. Net income increased by 22.1% to €1,329.7million – €888.4 million in Spain – whilst its gross operating profit (EBITDA) amounted to €216.7 million. The group’s profit for the full year after tax shot up by 85.6% to €46.4 million and its net debt decreased by 15.3% to €717.3 million, to yield a ratio of net debt over EBITDA of 3.3x.

By division, Barceló Viajes, which will soon be renamed B The Travel Brand, recorded revenues of €1,200 million in 2014, up 14.2%. The increase came as a result of the decrease in the number of operators in the Spanish market – after the disappearance of Marsans and Orizonia – and the upturn in domestic demand.

At 31 December 2014, Barceló had 653 agencies, several tour operators and the charter airline Evelop.

Latin America

In the hotel segment, the company highlights the rise in the average daily (room) rate and revenue per room, which allowed it to offset the 0.6% decrease in its occupancy rate. In Latin America, Barceló’s properties recorded EBITDA increases of 30% and overall accounted for 74% of the group’s total profits. In addition to the increase in (room) rates, Barceló’s policy to refurbish its hotels has also had an effect. Since 2007, the group has spent more than €1,000 million in this area – €90 million in 2014.

At 1 March 2015, Barceló operated 95 hotels – it owned 55% of these and rented 27% – and 29,375 rooms in 16 countries. 59% of its properties are four-star hotels and 65% are sun and beach locations. Moreover, Barceló owns a 40% stake in Crestline, a company that manages another 74 properties in the USA.

After opening two hotels in 2014, the Group’s routemap includes resuming growth. As such, the chain has started the year by opening a new hotel in Puebla (Mexico) and will incorporate another six properties (into its portfolio) before 2016.

In parallel, at the beginning of 2015, the Group created a Socimi with Hispania. It will transfer 16 hotels and two shopping centres valued at €421 million to this entity to reduce its exposure to real estate, which is currently at its highest level ever. Similarly, in 2014, Barceló sold a number of its hotels in the USA and Dominican Republic.

This year, the goal of the company, which is controlled by the Barceló family and employs 23,681 people, is to generate EBITDA of €251 million and net profit of €99.8 million.

In 2014, Barceló agreed to distribute €10 million in dividends and has proposed an additional payment of €4.3 million in 2015, which is pending shareholder approval.

Original story: Expansión (by Y. Blanco)

Translation: Carmel Drake

The Top 7 Banks Reduce Their Exposure To Toxic RE Assets

3 March 2015 – El País

In 2014, loans to property developers and the overall volume of unpaid debt held by the top 7 banks decreased significantly, whereas the number of homes and plots of land they held increased.

Spain’s real estate bubble was largely a credit bubble. The excess amounts committed during the boom years subsequently gave way to a severe economic and financial crisis that forced Spain to ask its European partners to come to the rescue, to clean up the majority of its savings banks. The large banks were not immune from these excesses, but their higher levels of diversification, their capacity to attract private capital and their more professional management limited the damage (they suffered). All of this meant that even the healthy entities have had to undertake long and expensive clean up processes, which are still on-going for the most part. As part of this process, Spain’s listed banks managed to reduce their overall volume of problem real estate assets for the first time in 2014, according to data from their recently published annual reports.

The seven banks that form part of the IBEX 35 index (Santander, BBVA, CaixaBank, Bankia, Sabadell, Popular and Bankinter) closed last year with non-performing and substandard loans to property developers and unpaid homes, plots of land and other real estate assets amounting to €125,000 million. That balance represented a reduction of €7,000 million compared with the previous year. These are gross figures. If we look at the volume of provisions, the volume of as yet uncovered toxic risk decreased to just under €65,000 million, having decreased by €4,000 million in one year.

Overall, the reduction in toxic assets was exclusively driven by loans, since the real estate assets held by the banks (homes, developments, plots of land and shares held in real estate companies) continued to increase despite the fact that the entities have also been stepping on the accelerator in terms of sales. The banks are still seizing, foreclosing and receiving deeds in lieu of payment, for more properties than they are managing to sell.

A large proportion of the debt from the bubble is completing its cycle in this way. The banks have increasingly less exposure in terms of loans to property developers; the amount held by these seven entities decreased from €85,179 million to €68,086 million during the year. Furthermore, the volume of loans to property developers classified as normal, or up to date, also decreased. Now, only €18,000 million of these loans are considered as healthy, i.e. a quarter of the total. A large proportion of the loans went from being healthy to substandard or non-performing. And from there, to being written off (when loans are removed from the balance sheet and 100% of the losses arising from non-payment are provisioned) or to being classified as foreclosed properties (due to the foreclosure of the property or the handing over of deeds in lieu of payment). In 2013, only the volume of healthy loans decreased; doubtful and foreclosed debt increased, i.e. the volume of toxic assets grew. In 2014, the volume of non-performing loans decreased so significantly that, although the number of properties increased, the overall volume of “potentially problematic” real estate assets (as defined by the Bank of Spain) decreased for the first time. Until now, the only reduction in toxic assets (or rather transfer) happened when the banks transferred much of their developer exposure to Sareb, the bad bank.

In terms of properties, the largest increase related to plots of land, the asset that it is hardest to market. The banks have made provisions against almost 60% of the original value (of the plots of land they hold), but some plots have lost even more of their value and the entities are still reluctant to sell at a loss. There is barely any demand, transactions are relatively scarce and the banks are still seizing land from property developers unable to repay their loans. Thus, the volume of land in the hands of the seven IBEX 35 banks closed 2014 at a record high of €28,127 million, up €2,500 million compared with the end of 2013. Given the difficulties the banks are facing to find developers to purchase this land for construction, they are starting to adopt formulas that allow them to share the risk with the developers in exchange for providing the land.

The number of homes coming from from unpaid mortgages is also increasing. Specifically, the volume increased by €1,000 million last year, to €14,161 million. In this case, the increase was largely due to a delay in foreclosures. Procedures to seize homes that began at the height of the crisis are only now reaching their conclusion, even though the mortgage default rate seems to have already hit its peak.

The picture is also very different between the entities. Bankinter holds the badge of honour; it was the only one of the seven entities that avoided the temptation of the housing bubble. Its exposure to the sector was extremely low and it has hardly any doubtful debts or foreclosed properties. Next in line is Bankia, although in this case, the clean up of its balance sheet is less impressive: since it was achieved through the transfer of the bulk of its toxic assets to Sareb and the acceleration of the provisions against those assets that remained on its balance sheet.

Of the major banks, the entity that has done the most to clean up its real estate exposure is Santander. Its toxic property assets now account for only 15.3% of its lending to the private sector in Spain and just 1.5% of its consolidated assets. One step below are CaixaBank and BBVA. The entity chaired by Isidro Fainé has the highest level of provisions and the bank led by Francisco González benefits greatly from the international diversification of its business.

Sabadell is a special case. It appears to have high exposure to toxic assets, but a significant portion is covered through an asset protection scheme (that it acquired) when it purchased CAM. The entity with the most work left to do on the clean up front is Popular. Even though it has boosted the sales of homes, it has the highest volume of toxic assets and the lowest level of coverage of any of the seven entities.

Original story: El País

Translation: Carmel Drake

Big Banks Record Losses Of €3,600m, Hit By Real Estate

9 February 2015 – El Mundo

The Ibex-listed financial institutions have doubtful balances and a portfolio of foreclosed homes amounting to €120,000 million.

During 2014, they sold more than 20,000 properties for a combined value of €11,700 million.

It will take Spanish banks two more years to “digest” the property binge that they enjoyed during the years of economic boom. The annual accounts of the listed entities – with the exception of Bankia, which has not yet published its results – show that, despite the recovery in the banking sector, the real estate sector continues to be a heavy burden – it generated losses of more than €3,600 million in 2014.

The indicators show signs of optimism, including the decrease in the default rate – which currently stands at 12.75% for the sector as a whole – and the decrease in doubtful assets by more than €20,000 million over the last year. However, the banks recognise that their exposure to the real estate sector will continue to be a hindrance throughout 2015 and 2016 at least, two years during which the market is expected to absorb most of the foreclosed assets (amounting to €60,000 million) accumulated by Santander, BBVA, Caixabank, Bankia, Sabadell, Popular and Bankinter.

The gross credit exposure to developers of these seven entities (all of which are listed on the Ibex) amounted to €103,000 million at the end of last year, although it should be noted that the figure for Bankia relates to the third quarter 2014.

From this quantity, just over €61,000 million is classified as doubtful (i.e. a non-payment of some kind has been recocorded) or sub-standard (credits that are currently being paid, but which are expected to go into arrears). According to the entities, this figure is lower than last year, due to the refinancings, recoveries and maturities that have taken place over the last year. But it is still a volume that requires a significant provision balance to cover the potential losses. Overall, the seven banks analysed recorded a total coverage against doubtful debts of €38,900 million at the end of 2014.

Last year was the first year in which the entities significantly reduced their provision coverage, following five years of crisis. “The results from the real estate sector clearly show the less negative impact that has resulted from the clean up of loans to developers and foreclosed real estate assets” says BBVA, a bank that recorded losses of €876 million in this area. Despite the size of the figure, it is 30% smaller than the €1,252 million losses recorded by the entity a year earlier.

Caixabank is the entity whose results have been hardest hit by the activity in the real estate sector. On 30 January, its CEO, Gonzalo Cortázar, predicted that the housing burden would have an impact on its financial results in 2015 and 2016 that this impact would “still be significant, although the digestion will be prolonged on a decreasing scale.

Santander has managed to reduce its loans to developers by 34% in the last year and has increased its coverage to 54%, but its annual results are still negative, with the entity led by Ana Botín recording a loss of €583 million.

Sabadell’s losses were even greater – €999 million and it has a gross exposure to the real estate market of €26,958 million, the highest in the sector, taking into account the foreclosed assets of CAM.

Fewer discounts

Bankia, Bankinter and Popular do not publish results about their respective real estate businesses. Popular is the bank that holds the greatest number of problem assets (doubtful and foreclosed assets) in proportion to the size of its balance sheet. It has loans amounting to €13,061 million in this category, with a coverage level of 44%. But the figures that really jump out are the volume of foreclosed homes, developments and land (€14,169 million) held by the entity, which closed the year with sales of €1,503 million.

Last year, some entities sold some of their house sale divisions. Altogether, these seven entities offloaded more than 20,000 units for a total value of €11,700 million. Sabadell was the most active bank in terms of house sales, generating €2,744 million. Various sources agree that 2014 was characterised by a reduction in the discounts applied, which in some cases, meant that the income received was actually higher than the recorded book value.

Some entities, such as BBVA and Sabadell, have an Asset Protection Scheme (Esquema de Protección de Activos or EPA) in place, following their acquisitions of Unnim and CAM, respectively. This insurance allows them to cover any additional deteriorations on their balance sheets over the next few years, through the Frob. Sabadell has recognised that it may start to use this financial cushion this year.

With the exception of Bankia, none of these companies has transferred assets to Sareb, the bad bank that absorbed loans to developers, and foreclosed homes and land, from entities that received public aid in the rescue of 2012.

Original story: El Mundo (by Javier G. Gallego)

Translation: Carmel Drake