Santander Engages Morgan Stanley To Execute Express Sale Of Popular’s Property

29 June 2017 – Voz Pópuli

Banco Santander does not want to waste any time with its sale of Popular’s properties. The entity chaired by Ana Botín has engaged Morgan Stanley to execute an express plan to get rid of the problem assets that it has inherited from its subsidiary, according to financial sources consulted by Vozpópuli. Sources at Santander declined to comment.

According to the same sources, the mandate does not outline the sale of specific assets, but rather it defines which would be the best solution: the rapid transfer of assets in large batches; the reactivation of Ángel Ron’s old idea of creating a bad bank (Project Sunrise); the transfer of assets to Testa and Metrovacesa; or taking things more slowly to benefit from the economic recovery.

It is about putting the real estate balance sheet in order and defining the best path for each asset type. But Morgan Stanley’s work, which is being led by its CEO, Juan González Pedrol, will not focus only on resolving Popular’s existing property puzzle. It is also meeting investors to get them to analyse assets and prepare bids.

The fact that Santander has already committed to a mandate of this calibre shows that it is not afraid of reducing the volume of problem assets, which amount to almost €50,000 million after the merger. That is something that investors would penalise in the event that those assets stagnated on the bank’s balance sheet. In that context, a few weeks ago, Botín committed to cutting Popular’s real estate exposure in half by 2019.

The person responsible for this task at Santander is Javier García Carranza, Deputy General Manager of the group and Head of Restructuring, Real Estate, Investments and Venture Capital. García Carranza joined Santander from Morgan Stanley, where he used to be responsible for Real Estate in London.

The mandate given to his former entity is one of the most sought-after in the investment banking sector, alongside the capital increase, from which Morgan Stanley has been ruled out. Names still in the running for that €7,000 million-operation include Citigroup and UBS, as global coordinators, and Credit Suisse, Deutsche Bank, Barclays, BBVA, HSBC and CaixaBank, according to Bloomberg (…).

Saracho’s plan suspended

One of the first measures introduced by Santander after it took control of Popular was to suspend the operations that Saracho’s team had set in motion. The former management team had at least two portfolios on the market (…).

Sources in the market expect Santander and Morgan Stanley to bring a large portfolio onto the market before the end of the year, given that there is a lot of demand from large international funds. The clean-up conducted during the merger, of almost €8,000 million, means that the group is ready for these operations.

Following the merger, Santander has accumulated problem assets amounting to €48,417 million, according to the latest official figures. Of those, €36,800 million come from Popular, with a coverage after extraordinary provisions of 66%, and €11,600 million from Santander, which before the merger held a coverage of 57%. That means that the new Santander-Popular entity has more assets than Sareb.

In addition, the group holds other investments, such as its stakes in Metrovacesa, Sareb and Testa Residencial, which, in the case of Santander alone, amount to €5,300 million.

Original story: Voz Pópuli (by Jorge Zuloaga)

Translation: Carmel Drake

Saracho Calls Time On Ron’s Plans For Popular’s Bad Bank

15 February 2017 – El Economista

Project Sunrise, designed by Ángel Ron’s team at Popular to extract €6,000 million worth of real estate assets from the entity’s balance sheet, has run aground. With less than a week to go before Emilio Saracho (pictured above) takes over the presidency, the former global vice-president of JP Morgan has announced that he is not convinced by the plan and has put a stop to it, according to sources.

The vehicle had been approved by the Bank of Spain, but had not yet convinced the Spanish National Securities and Exchange Commission (CNMV) or the European Central Bank (ECB). Their aversion to the plan seems to have led Saracho to reject it. Although the star plan to clean up the balance sheet had received support from the bank’s Board of Directors, the difficulties involved in deconsolidating the portfolio of non-performing assets and the potential risks that could result for the future owners of the vehicle, are hampering its execution. (…).

Moreover, the real estate company has also been impeded by a more limited appetite than it had hoped for from the investment banks, whose involvement is key. The plan is for the company to be financed through senior bonds, subscribed to by those investors and subordinated debt, which will constitute the remuneration that the bank will receive from the company in the future. At the time, the entity confirmed that the interest expressed by JP Morgan, Morgan Stanley and Deutsche Bank was sufficient to crystallise the project. But, in order to deconsolidate the real estate company, the senior bond tranche must represent a majority and a low uptake from the investment banks is likely to increase the cost of that bond issue.

Ron acknowledged in his public farewell, alongside the CEO, Pedro Larena, that Project Sunrise has suffered certain changes from its original scope, but that Saracho was aware of these, along with other measures.

During the last quarter of 2016, the entity recognised an additional €3,000 million in non-performing assets and allocated €5,692 million to clean up efforts, rather than €4,700 million, the amount it had planned to set aside when it carried out its €2,500 million capital increase last summer. The effort reflects that recognition of a greater volume of toxic assets and also served to cover the costs of the adjustments to branches and staff, the impact of the floor clauses and the unexpected losses in TargoBank (…). Nevertheless, it was insufficient to reach the goal in terms of doubtful debt coverage and provisions for properties.

Shock therapy

Saracho was reportedly aware of all of this. Nevertheless, the banker will start work without a pre-determined road map (…) on the understanding that the bank needs to define a comprehensive shock plan.

Saracho will conduct a detailed analysis to assess the entity’s viability and to define its new strategy. Ron was committed to making the bank smaller, focusing on its profitable business niche of SMEs in Spain and spinning off its subsidiaries in the USA, Mexico and Portugal, where the interest aroused will ensure a positive return on investment – market sources speculate that the private bank, and even the insurance business, are included in this equation.

The sources consulted also say that these changes, if they are undertaken, would help restore solvency, but would not be sufficient to ensure the bank’s future. After a detailed analysis of the situation, Saracho will have to choose the best option for his shareholders from a handful of scenarios.

If he thinks the entity is viable, it is unlikely that he will undertake another capital increase (…), but may include transferring assets to Socimis or integrating them into real estate companies in which the bank holds a stake.

In the worst case scenario, the new manager faces the option of breaking up the group and selling it off in parts or by asset. And whilst a sale to a competitor or a merger is not unthinkable, a priori, it appears to be the least attractive option for shareholders, given the lack of interest in the sector.

Original story: El Economista (by Eva Contreras and Lourdes Miyar)

Translation: Carmel Drake

Popular’s Bad Bank Will Not Have To Publish Historical Accounts

24 October 2016 – Expansión

The bank will adopt the exemption granted by the regulations governing stock market IPOs and as such will not have to publish its accounts for the last three years (given that such accounts do not exist). Nevertheless, the new company must show that it has a viable long term future.

The regulations governing stock market IPOs require companies wishing to list for the first time to present audited accounts for the last three years in their admissions prospectus. However, the real estate arm of Popular is unable to fulfil this requirement because it does not exist yet. Moreover, the aim is that when it is constituted, which should happen during the first few months of 2017 at the latest, its assets will be removed from the bank’s balance sheet (…).

Despite the lack of accounts for the previous three years, it will be possible for the entity to debut on the stock market because the regulations themselves state that IPOs may be authorised without fulfilling that requirement.


In the history of Spain’s stock markets, numerous companies have made use of this exemption, including the debut on the stock market of Bankia and Banca Cívica in the summer of 2011, and the more recently and plentiful Socimi debuts, which have chosen to list on the stock market without providing accounts because they did not exist at the time. (…).


From the perspective of the banking supervisor, it will be essential for the real estate company to make clear that it is not related to the bank in any way, for it to be able to authorise the deconsolidation from Popular Group’s balance sheet. To this end, the company’s liabilities must unequivocally reflect the independence of the two companies.

The liabilities shall comprise three major captions: capital, subordinated debt and other debt that the real estate company needs to balance the company’s assets.

The capital, whose amount is still to be determined, shall be paid in its entirety by Popular, which will distribute it immediately to its shareholders.

The subordinated debt will be acquired by Popular. Its amount may not be too high in order to ensure that it may not be concluded, under any circumstances, that the new company depends or may depend on Banco Popular. Finally, the bulk of the liabilities will comprise debt, which will be sold to institutional investors. The volume and price of that debt has not been determined yet.

On the asset side, properties with a book value of €6,000 million will be transferred, but they will be pass onto to the real estate company for a value of around €4,000 million.

The difference represents the provisions that Popular has already recognised or will recognise to reduce the value of the transfer to the figure that ends up being agreed upon. (…).

Once all of these figures have been reconciled, the company will still need to demonstrate that it is solvent by itself and that, therefore, the revenues forecast in the business plan will be sufficient for the real estate company to reduce its debt and generate positive results, which will allow it, in turn, to remunerate its shareholders through the payment of dividends. (…).

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake

80% Of Popular’s Bad Bank Will Comprise Finished Homes

24 October 2016 – El Confidencial

The first details are emerging about Project Sunrise, the bad bank in which Banco Popular is planning to segregate properties amounting to €5,800 million (gross) (€4,000 million net). Approximately 80% of its assets will be finished homes, which the entity hopes will reduce the risk associated with the project and facilitate sales of the vehicle, according to financial sources close to the project. As a result, the entity chaired by Ángel Ron hopes to reach “break even” in its third year of life, in other words, in 2019, and to generate profits thereafter.

According to the plans for the aforementioned bad bank, more than €3,000 million of Sunrise’s balance sheet will correspond to finished homes, whereas only around €400 million will relate to land – the second most important asset. In third place, the bad bank will hold developments in progress with a gross value of €300 million and finally, Popular will transfer homes for rent amounting to another €200 million. It total, more than 40,000 individual assets will be transferred to the new entity.

The bank is looking to increase the quality of the assets that it transfers to this vehicle and whereby achieve a dual objective: on the one hand, improve its prospects for sales and revenues, given that finished homes have more appeal in the market (when compared to land or developments in progress, which require additional investment to be completed); on the other hand, allow lower provisions to be recognised upon transfer, given that the prices at which the assets were awarded to the bank do not need to be reduced by as much in these cases. The average provisioning level of Sunrise’s assets will amount to 31%.

Profits from year 3 onwards

And it is precisely thanks to this greater ease to sell the bad bank’s assets that Popular expects that the new vehicle will emerge from losses during its third year of operation, in other words, in 2019 (it plans to list on the stock market in 2017). Sunrise’s business plan forecasts profits of around €50 million per year for the next two years, according to sources consulted.

To this end, the bank chaired by Ron is relying on a strong performance in the Spanish real estate market, based on good economic forecasts, low interest rates and improvements in other indicators, which are already being seen in some cases, such as the number of mortgages, the volume of house transactions and the prices of operations. According to their calculations, house prices are still undervalued and as a result, will continue to rise over the next few years.

The bad bank, vital for achieving its objectives

The segregation of the bad bank is one of the fundamental milestones in the restructuring plan that Popular presented to justify its €2,500 million capital increase in June, given that, by removing almost €6,000 million (gross) in real estate assets from Popular’s balance sheet, the entity will free up capital and strengthen its solvency levels. Nevertheless, it has faced difficulties due to the lack of buyers interested in the vehicle, and so it has decided to list the vehicle on the stock market by gifting its share capital to the banks current shareholders in the form of a dividend. (…).

Original story: El Confidencial (by E. Segovia and J. A. Navas)

Translation: Carmel Drake

BdE Rejects Popular’s Proposal To Carve Out Its Bad Bank

14 October 2016 – El Confidencial

The cornerstone of Banco Popular’s new business plan, the carve-out of its bad bank (so-called Project Sunrise) has been blocked by the Bank of Spain.

According to sources close to the operation, the supervisor has refused to allow the accounting deconsolidation of this vehicle in which the bank was planning to group together the majority of its real estate assets, given that the solution would not transfer the risk outside of the group and the provisioning level (33% of the gross value of the assets) is insufficient for such an operation. As a result, the entity chaired by Ángel Ron will have to assess alternative options.

Popular’s bad bank project seeks to remove €6,000 million in gross real estate assets from Popular’s balance sheet (initially that figure was going to be €7,500 million, but the worst assets were removed from the portfolio in the hope that approval would more likely be obtained) with the aim of freeing up capital, an operation that the bank regards as critical if it is to meet the objectives it promised investors when it completed its capital increase in June.

But, as things now stand, Project Sunrise may now only be carved out from the bank at the individual level and not from the consolidated group, which is ultimately what matters to the ECB in terms of solvency. Similarly, the carve out would not stop the calendar of provisions for foreclosed properties, with the consequent cost for the bank. A spokesperson for the entity highlighted that the project has not yet been formally presented to the Bank of Spain. Popular’s share price fell by 7% during morning trading to €1.02/share, a new historically low value.

There are basically two obstacles standing in the way of the full carve-out, according to sources. The first is that Banco Popular would be the main financer of its bad bank, which will have share capital equivalent to just 13% of its assets, and it may have to continue as the shareholder. The supervisor governed by Luis Linde has refused to grant permission to other banks in similar circumstances for the deconsolidation of this type of vehicle, and so authorisation in the case of Popular would represent an unfair situation for its competitors.

The second is that the provisioning level is very low, currently equivalent to just 33% of the gross value of its assets (which means that their net value amounts to €4,000 million), when the market requires a minimum of 50% for these kinds of assets, which are basically low quality Spanish properties. This is justified because Popular expects to see price rises of up to 14.2% with respect to their current value in its most positive scenario, but the market considers that this forecast is too optimistic. All of this means that there will not be sufficient investors willing to buy this structure to allow Popular to reduce its stake below 51%.

The only solution: recognise more provisions

Given this blockade, Ron is exploring other alternatives, such as listing the vehicle on the stock market and gifting its capital to the bank’s current shareholders in the form of a dividend. But that solution is far from optimal because it means that the financing risk would remain inside the Popular group and because it would need to place more than 51% of the share capital by means of this gift. Besides, the entity would have to assume the cost, which is the present value of the future cash flows that it expects to obtain from the sale of these assets.

According to some banking experts, the only solution that may save Project Sunrise would be a sizeable increase in its provisions, which would reduce the net book value of the bad bank and facilitate the generation of profits from the sale of its properties. Only this measure would allow Popular to obtain sufficient demand from investors to place a significant percentage of the share capital and to obtain financing from outside of the bank. But that would mean significantly increasing the €4,700 million provisioning level that it announced when it completed its capital increase, which would in turn cause its losses to soar.

“We are not going to give away the money we raised during the capital increase”

Moreover, this measure goes against the philosophy under which Popular undertook its capital increase and clean-up: “We are not going to give away the money we raised during the capital increase to buyers of the vehicle, we are not going to use the funds that our shareholders have given us to reduce the transfer price and whereby allow other parties to make money from our assets”, explained a source at the entity.

And so, Popular is facing a situation in which it is going to be very difficult to find solutions that are satisfactory for it and at the same time keep the Bank of Spain happy. The problem is that time is running out and the market – which has serious doubts over its capacity to fulfil its promises this time after it failed to do so following its previous capital increase – is not going to extend the period for it to complete its feasibility plan beyond the first quarter of 2017. And it is not just the market, some of the Board members, led by the Mexican Del Valle family, have already made an attempt to replace Ron and have even started talks with other banks regarding a possible merger.

“The managers at the bank are very clear that everything is at stake over the next six months: if they do not fulfil their objectives in terms of provisions, restructuring, the sale of the bad bank, etc., then they know they will be done for”, concludes one of the sources consulted. And the segregation of Sunrise is the key to fulfilling these goals”.

Original story: El Confidencial (by E. Segovia and J. A. Navas)

Translation: Carmel Drake

The Banks Want To Regain Control Of Their RE Servicers

14 October 2016 – El Confidencial

Just three years after selling the management of their real estate companies to large international funds, Spain’s large banks are engaged in a widespread movement to try to regain control of those companies once again and as such, achieve absolute freedom to sell their properties by other means.

The reason? There are basically two motives. On the one hand, the banks consider that more profitable options exist to allow them to divest property without penalising their capital; and on the other hand, they want to save the management commissions that they are having to pay the funds for taking over the reins of these real estate companies, known in the jargon of the sector as “servicers”, and whose fees rise in line with the volume of assets managed.

Looking back…in December 2012, Banesto agreed the sale of Aktua to Centerbridge; in September 2013, Caixabank sold 51% of Servihabitat to TPG and Bankia sold 100% of its real estate company to Cerberus; two months later, Santander reached an agreement with Apollo to sell 85% of Altamira and Popular sold Värde and Kennedy Wilson 51% of Aliseda. Sabadell and BBVA, the other two large Spanish banks, chose to continue to manage their assets internally; the first through Solvia and the second through Anida.

Nevertheless, the majority of these marriages of convenience have been suffering from serious tensions for a while now; and these differences of opinion are causing the banks to begin to try to regain control of their real estate companies. According to El Confidencial, Popular is trying to reach an agreement with Värde to repurchase Aliseda and transfer its assets to the so-called “Proyect Sunrise”, a kind of bad bank through which it seeks to divest up to €6,000 million.

Santander has also been engaged in negotiations for severals months with Apollo, from which it already snatched a series of assets from the former real estate fund Banif to transfer them to Metrovacesa, the real estate company that has just finished merging its properties (not its land) with Merlin. In fact, that operation is an example of the type of project that the sector is now committed to, and which has caused all kinds of rumours to circulate about potential alliances.

For example, the entity chaired by Ana Patricia Botín and BBVA have found another way of getting rid of almost 7,000 homes (between the two of them) in the form of Testa, the rental housing subsidiary owned by Merlin. The two banks are deconsolidating all of the real estate assets that they are transferring to both Merlin and Testa, because they hold minority stakes, and this allows them to generate liquidity because the former is a listed company and the latter will be listed on the MAB from next year and on the main stock exchange within five years.

In the case of Servihabitat, Caixabank will be able to start to seriously consider a movement of this kind from next year, given that for the first four years (of the ten-year duration of their alliance), TPG has a special grace period, according to sources familiar with the agreement.

The case of Bankia is special, because the bulk of its assets were transferred to Sareb and it accounts for the real turnover of Haya Real Estate, the “servicer” created by Cerberus, given that the company was created with €12,200 million of the entity’s real estate assets and with €36,000 million from Sareb. Moreover, the fund acquired the companies Reser Subastas and Gesnova from Bankia.

Last year, Gesnova lost the entire portfolio of contracts that it held with the former real estate fund of Bankia, which was sold to Goldman Sachs, a blow that was compounded by Sareb’s decision to award Solvia the management of the portfolio of foreclosed assets that until then had been managed by Gesnova. In total, Haya saw a quarter of its revenues go up in smoke.

“All of the banks are looking at how to regain control of their servicers because they are realising that better alternatives exist, above all following the Metrovacesa operation, and in light of the fact that the real estate market is recovering”, said one source. “Everyone is talking to everyone else, lots of potential alternatives are being presented, which may or may not materialise, but the reality is that there is going to be a lot of movement in the world of the servicers over the next two years” said one executive from the sector.

Meanwhile, the funds are willing to withdraw from their investments provided the entities are willing to stump up the cash. In the case of Apollo, the figure is likely to exceed €1,000 million and in the case of Värde €800 million, according to sources. (…).

Original story: El Confidencial (by R. Ugalde)

Translation: Carmel Drake