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

Ibercaja Sells 505 Property Developer Loans For €489M

10 July 2017 – El Periódico

On Friday, Ibercaja announced a sales operation that will allow it to significantly clean up its toxic assets. Specifically, the bank has completed the sale of 505 property developer loans and credits – most of which relate to “doubtful” assets” – amounting to €489 million. The size of this portfolio represents a decrease of 36% in terms of the total number of doubtful property developer loans that the entity held as a March 2017.

In this operation, known as Fleta, 43% of the portfolio comprises loans granted to finance land purchases, which represents “the highest percentage of such loans in an operation of this kind recorded in Spain to date”, said sources at the Aragon entity on Friday.

Moreover, the deal allows Ibercaja to bring its default rate below 8%, a figure that forms part of the strategy to optimise its balance sheet and provide a commercial boost, established in the entity’s strategic plan for 2015-2017.

Since the end of 2014, the year when the aforementioned plan was launched, the volume of doubtful loans has decreased by €1,103 million, in other words, to 57% of the initial volume.

The portfolio has been sold to the company Fleta Issuer Holdings Designated Activity Company, after a process in which “first-rate” domestic and international investors have participated “which reflects the interest received for the offer in the market”, said the bank.

On the other hand, Ibercaja has increased the financing of new real estate projects. In 2016, it tripled the number of homes it financed with respect to 2014. During those three years, it financed 150 new projects, most of which are located in Madrid, Barcelona and Zaragoza.

That milestone, add sources at Ibercaja, followed others that have been fulfilled in accordance with the strategic plan, which “is reinforcing the financial strength of the entity, driving the transformation of the business model and activating the geographical growth plans for the retail business”.

Financial operations

In March of this year, the entity considered the early repayment of all of the contingent convertible bonds (CoCos) issued by Caja 3 and subscribed by the FROB in 2013, amounting to €223 million.

Moreover, last October, the entity placed an issue of 7-year mortgage bonds amounting to €500 million on the capital markets. In July 2015, Ibercaja was the first unlisted entity to issue subordinated debt, amounting to €500 million with a 10-year term, since the start of the restructuring of the Spanish financial system.

A few months later, in October 2015, the bank closed an operation similar to Project Fleta, when it sold a portfolio of 428 property developer loans, mostly doubtful, for €698 million, in an operation known as Goya.

Original story: El Periódico

Translation: Carmel Drake

Sareb’s Investors Will Lose 30% Of Their Investment

7 April 2017 – Expansión

Sareb, the bad bank that took over most of the toxic real estate assets from the banks intervened by the State through the Frob, announced a substantial modification to its business plan last week. The change represents an acknowledgement of the fact that, at the end of the entity’s life, in 2027, its shareholders will have lost 30% of their initial investment, almost €1,440 million. As such, the shareholders are going to have to recognise provisions for that impairment this year.

The creation of Sareb (which began operating in 2013) was conducted after the State received European aid to clean up the domestic financial system. It was not possible before because the Treasury did not have sufficient funds to do launch the initiative alone.

In an attempt to ensure that the State’s contribution would not add to the public deficit, a procedure was carried out whereby the private banking sector, insurance companies and some real estate companies contributed most of the necessary own funds (55%) and the Frob contributed the remaining 45%. This meant that in total, €4,800 million was contributed, €1,200 million in the form of capital and €3,600 million in the form of subordinated debt, convertible into capital, which would receive a relatively high remuneration if the company were to generate profits.

Sareb obtained the other resources required to pay for the real estate assets acquired from the banks in difficulty, by issuing debt over one, two and three years, which the entities from which the assets had been acquired were obliged to subscribe to and which is now being renewed for equal periods as it matures, but in reducing amount thanks to Sareb’s ability to generate funds to repay it.

All of the private banks, with the exception of BBVA, answered the call of the economic authorities and invested on the basis of their size. Santander put €805 million in the pot; CaixaBank, €581 million; Sabadell, €321 million; Popular, €276 million, and Kutxabank, €122 million. The other entities contributed smaller but no less representative amounts, based on their size.

Initially, the business plan forecast that the entity would become profitable after five years and it was stated that the company would generate an annual return of 14% over the course of its 15-year life. (…).

When the President of the entity, Belén Romana, was replaced by Jaime Echegoyen, that long-term business plan was modified to try to bring it closer to the reality of the problem assets whose orderly exit is complicated and whose profit generating ability is pretty much impossible.

The Ministry of Economy decided that the supervisor of Sareb’s accounts should be the Bank of Spain because the assets had come from financial institutions and because a large part of them were essentially problem loans. The supervisor established some very strict accounting standards regarding provisions (…), which forced the bad bank to register losses from its first year onwards, which reduced the level of capital subscribed by the shareholders by the same proportion. (…).

The evolution of the market and of Sareb itself have meant that, again, a revised business plan is being prepared to reflect the latest reality, which, according to the statement made to shareholders last week, not only completely abandons the plans for Sareb’s owners to obtain any returns from the risk they have borne, but also recognises that the total liquidation of the assets will result in losses of around 30% on the capital and debt invested. In other words, the investors will recover €3,360 million at most and will certainly lose €1,440 million. The Frob stands to lose the most: almost €650 million.

Most, if not all of those who invested in Sareb understood that they were providing a service to the country and that obtaining any returns was very unlikely and that there may be losses at the end of the process. Losses that they would recognise when the time came.

But the situation has now changed. This latest announcement means (….) that the shareholders have no choice but to recognise provisions for the losses announced this year. That means a new effort for the banks, some of which are already very stretched in terms of their provisions for this year.

Original story: Expansión (by Salvador Arancibia)

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

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

Deutsche Will Partially Finance Popular’s New RE Firm

21 November 2016 – Expansión

Popular has taken a new step in the constitution of its real estate company, a key project in its attempt to try to recover investors’ lost confidence, which it hopes to have ready by the first quarter of next year. According to financial sources, Deutsche Bank has reached a preliminary agreement to finance this company.

In total, up to six banks and funds have expressed interest, which does not mean that they will all end up participating. However, according to sources close to the process, “these players are being offered provisional agreements to invest between €200 million and €500 million”. The same sources state that they have also held talks with the giants Apollo and Cerberus, who declined to comment about the process.

Popular wants to transfer assets with a gross value of €6,000 million, primarily finished homes, to the new entity. Specifically, for this reason, executives at the entity feel uncomfortable that the project is being referred to as the bad bank in financial circles because it will also incorporate high quality assets.

On the liability side, the company will initially have share capital contributed by the bank, which will then be distributed amongst all of its shareholders in the same proportion as their existing shareholdings. In addition, the company will issue subordinated debt, which Popular will subscribe to, as well as senior debt.

It is expected that the banks and funds that want to participate in the financing will do so through this latter (senior debt) tranche.

According to a report from Bank of America Merrill Lynch last Thursday, in which the firm reduced the target price from €1.30 to €0.75, the company’s liabilities will be constituted as follows: the share capital will amount to €975 million, whilst the senior debt will amount to €2,200 million and the subordinated debt will amount to €1,400 million. The US bank’s analysts predict that the players who finance the senior debt tranche will request an IRR of 10%.

Deutsche Bank, which together with EY, is acting as financial adviser to the project, as well as Apollo and Cerberus, have been active in the Spanish real estate market in recent years. The former acquired two portfolios from Bankia, between the end of 2015 and this summer, comprising loans, both real estate and property developer related, worth almost €1,000 million. Meanwhile, Apollo has acquired several portfolios (it recently bought a hotel portfolio from CaixaBank) and controls the former platform (servicer) of Santander, Altamira. And Cerberus, which hired the former CEO of BBVA, Manuel González Cid in 2014, owns the real estate arm of Bankia, now Haya Real Estate, and the Cajamar platform.

Assets on the balance sheet

Popular has damaged assets on its balance worth €33,000 million before provisions, which amount to another €15,000 million. According to Bank of America, this high volume (of assets and provisions) eliminates many potential interested parties from a merger. Besides constituting this company, Popular also wants to accelerate the sale of these assets through both its wholesale and retail channels.

The bank earned €94.3 million during the first nine months of 2016, 66.1% less than during the same period in 2015. Nevertheless, its banking activity (when separated out from its real estate business) generated profits of €817 million.

Original story: Expansión (by D. Badía)

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.

Precedents

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. (…).

Independence

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

Sareb Sells 25% More Tourist Homes Than It Had Forecast

5 September 2016 – El Mundo

This summer, Sareb has taken advantage of the fact that savers have limited alternative investment options and that its assets are well priced…to boost property sales.  (…).

Unlike other commercial companies, the aim of Sareb (in which the State holds a 45% stake) is to reduce its balance sheet by selling off all of its assets, which primarily comprise non-performing or risky real estate loans and involve more property developers than individual borrowers, inherited from the former troubled banks.

In this case, the typical clients of the company chaired by Jaime Echegoyen (pictured above) are large financial investors specialising in generating profits from assets that the banks are unable to maintain. Nevertheless, with the activation of demand in the second-hand real estate sector, the bad bank is trying to take advantage of every opportunity and in April it put 2,237 homes up for sale (to private investors) along the coast.

The commercial objective is much lower and the bad bank does not intend to liquidate 100% of its supply. Nevertheless, between sales and reservations, the company has managed to offload 330 homes this summer for a total amount of €31 million, which represents a 25% increase with respect to its budget. The company has not revealed the prices at which it acquired these assets from their original owners.

Sareb, which uses sales companies belonging to or related to Bankia, Banco Sabadell, CaixaBank and Santander, will extend the campaign that it launched in April by at least another month to try and maximise the returns from savers interested in acquiring properties at good prices. The prices of the homes put up for sale in 20 provinces across nine autonomous regions started at €32,000 for a flat in Torrevieja (Alicante) and went up to €866,000 for a 342 sqm family home in Calviá (Palma de Mallorca) with five bedrooms, four bathrooms and a swimming pool.

Neither of those properties have been sold yet. Half of the homes in the portfolio are located in Valencia, where several now extinct entities, such as Bancaja (Bankia) and Caja de Ahorros del Mediterráneo (CAM, nowadays part of Banco Sabadell) undertook very intense activity in the run up to the burst of the real estate bubble. Specifically, the province with the highest number of properties up for sale is Castellón, with 791 homes. (…).

Last year, Sareb owned 105,000 properties, 80,000 loans and 375,000 collateral properties. Nevertheless, the Bank of Spain issued new regulations, which come into force in October, requiring the bad bank to individually value each asset on a regular basis using a methodology validated by the supervisor; that forced the bad bank to update the value of all of its assets. Sareb was thus required to perform an additional clean up amounting to €2,044 million, an operation that followed other similar measures already undertaken in 2013 and 2014, amounting to €968 million.

For that reason, the entity needed a recapitalisation, which its shareholders undertook converting €2,170 million of subordinated debt into capital, which it used to finance the acquisition of toxic assets from the rescued banks. (…).

Original story: El Mundo

Translation: Carmel Drake

Sareb Plans To Return €6,000M To Its Shareholders

16 June 2016 – Expansión

Sareb has a business plan on the table that involves returning its shareholders all of their investments, including an annualised return of between 1% and 2%. According to the explanation provided yesterday by the Chairman of the company, Jaime Echegoyen, these plans involve paying back €6,000 million to the banks and insurance companies that hold its share capital, together with the Fund for Restructuring (the Frob).

Between 2012 and 2013, those shareholders invested €4,800 million in Sareb – €1,200 million in share capital and €3,600 million in subordinated debt. The investors have already written off around three quarters of that amount.

Echegoyen, who was speaking yesterday at an event organised by UIMP, Apie and BBVA, did not specify whether the €6,000 million would be returned in cash or by handing over assets that the bad bank has not been able to sell by the time it has to be wound up, November 2027.

The Chairman of Sareb praised the role of the entities that supported the creation of the company, all of the major banks with the exception of BBVA. (…). The company’s most senior executive said that it was “time to help the whole country” (…).

Podemos’ plans

Echegoyen also made reference to the possibility that Sareb may be converted into a public housing stock, as proposed by (the political party) Podemos, something that in his opinion would have serious consequences for the Spanish economy.

“I don’t think we should forget that Sareb owes €43,000 million. If anyone wants to do anyhing with Sareb, they would have to deal with Parliament first and then Brussels”, he explained, before adding that “those €43,000 million would mean raising the deficit by 4 percentage points”.

Meanwhile, Sareb’s Chairman reported that the company has now sold 35,000 properties since it was created, although the rate of sales has decelerated slightly in 2016, to 25 homes per day, compared with the average of 27 since 2013. Despite that, he said that “we are performing in line with budget” and he maintained the goal to “stop losing money in 2017”.

This slight slowdown has happened despite the fact that the real estate market is experiencing a “sweet moment”, according to Echegoyen. This is reflected by the fact that new, more conservative, investors, “such as Socimis, family offices, insurance companies and private banks have covered the gap left by the opportunists”.

The importance of property

According to the executive, low interest rates are encouraging investors to pay attention to real estate assets. “Property is intrinsic to human beings, above all Spaniards”, he said. “Banks are still granting finance, but are no longer allowing any nonsense”, he added.

The Chairman of Sareb acknowledges that competition is being felt from other banks when it comes to selling properties, although he pointed out that the financial institutions are in more of a hurry to sell given the pressures (they face) from the stock market and capital requirements.

“We have time, a trump card, on our side, which lasts for the next 12 years. Furthermore, we are never going to be listed on the stock exchange, which means that we are not subject to pressure from the financial markets”, he noted.

Original story: Expansión (by J. Z. and S. A.)

Translation: Carmel Drake

Sareb Expects To Pay Its Bondholders A €1,000M Coupon

13 May 2016 – Expansión

Sareb’s shareholders are fully aware that they will never receive any dividends. Neither the private institutions, mostly banks and insurance companies, which own 55% of the so-called bad bank; nor the State, which controls the remaining 45% stake through the FROB (‘Fondo de Reestructuración Ordenada Bancaria’ or Fund for the Orderly Restructuring of the Banking Sector) expect to receive any returns on their capital, in accordance with the company’s original business plan.

But the institution led by Jaime Echegoyen (pictured above) plans to repay them by other means. Sareb is hoping to pay its shareholders a coupon of €1,000 million, over its remaining twelve years of life, in return for the subordinated debt that they subscribed to, to get it on its feet, according to sources close to the bad bank.

In order to provide the company with sufficient own funds, the shareholders subscribed to convertible subordinated bonds amounting to €3,600 million, which were added to the €1,200 million of pure capital that had been contributed by its investors, to take its own funds to €4,800 million.

Accounting circular

The new accounting framework established by the Bank of Spain, which came into force last year, forced Sareb to individually appraise all of its assets and adjust them to reflect market value and, in this way, to undertake a thorough clean up (of its balance sheet), which resulted in significant losses and additional capital requirements.

To cover those without resorting to a capital increase, the company capitalised debt amounting to €2,170 million. In this way, only the remaining subordinated debt holders (who hold €1,429 million) will end up receiving the coupon.

Before the shareholders receive the interest amounting to 8% p.a., Sareb will have to generate sufficient consolidated profit before tax and cash and, also, have paid the interest rates on the senior bonds that it issued to the former rescued savings banks in return for the foreclosed assets and property developer loans that they transferred to it.

Two annual payments

After the shock of the accounting circular, the so-called bad bank is confident that it will be able to leave behind its losses and break even in 2017, before generating profits in 2018, the date when the bondholders will begin to receive the annual coupon for the first time.

Nevertheless, their remuneration would not necessarily be reduced in the event that Sareb has to wait until 2019 generating any profits, given that the amount of interest accrued in 2018 would be rolled into the receipt for the following year. Thus, on the payment date, they could receive the annual payment for the current year as well as for the previous year. They may not receive more than two payments.

Santander and CaixaBank

The conversion of debt into capital, approved by Sareb’s General Shareholders’ Meeting at the beginning of May, did not affect the subordinated debt stakes held by each one of the bondholders, most of whom are also shareholders. As such, and until the operation goes ahead, Santander is the largest private bondholder, with a 16.6% stake, amounting to €237 million.

The next largest bondholder is CaixaBank, which holds 12.2% of the debt, worth €174 million, followed by Sabadell, with a 6.6% stake (€94 million) and Popular, with a 5.7% stake (€81 million). Meanwhile, the State holds debt amounting to €656 million, through the 45.9% stake that it owns through the Frob.

Original story: Expansión (by A.Crespo and S.Arancibia)

Translation: Carmel Drake