‘Bad bank’ may be good news for distress hunters in Spain


Spanish banks start to tackle bad property debts, but disposals will take time, reports Lauren Parr

Opportunistic investors are limbering up to buy property in Spain in response to the creation of ‘bad bank’ Sareb late last year and as Spanish banks become more proactive.

“The bid/ask spread has narrowed and German investors there are trying to sell; billions need to get sold,” says one private equity investor that has a Spanish-speaking team on the ground looking at possibilities.

For example, German bank Hypotheken Frankfurt (formerly Eurohypo) just sold six assets from a non-performing loan portfolio called Project Copernicus for €100m, to hedge funds Anchorage Capital and Värde.

The pair have kept three Madrid buildings and sold three, including two in Barcelona, to a family office. Spanish property company Monteverde was the borrower.

The bank is also selling ABC Serrano Mall in Madrid. The borrower was Reyal Urbis, which this month announced that it had filed for protection from creditors. It owes lenders including RBS and Santander, as well as Sareb, €3.6bn.

Madrid and Barcelona are where most investor interest is focused, reckons one market spectator, who notes: “There’s enough distress there to not have to think about going outside them.”

Spain’s property market is a beacon of distress and so far there are fewer competitors there than elsewhere in Europe. Banking reforms have encouraged investors, with banks forced to set aside more than €70bn to cover losses on bad property debts last year.

This is driving banks that were initially slow to tackle real estate debt problems to try to unload bad debt. Some have now adjusted the value of property portfolios on their books in a move to clean up their houses.

Loan packages ‘floating around’

“There are a few people with things going on,” says one fund manager, who adds: “There are packages quietly floating around.”

Goldman Sachs, Morgan Stanley, Apollo and Cerberus are looking at the market, while Hudson Advisors, Lone Star’s asset management arm, opened a Madrid office last year. Juan Pepa, its formerly London-based dealmaker for Europe, is now the firm’s man targeting Spain.

Santander was ahead of the pack in selling €350m of residential non-performing loans to Lone Star last year, besides other sales to Cerberus and Fortress.

02.13 Spain table p20The bank is planning more bulk sales of loans and foreclosed assets before Sareb becomes fully operational.

At the group’s full-year results presentation last month chief executive Alfredo Sáenz Abad said: “We’re worried about Sareb’s entry into the market. Anything we can sell before Sareb is up and running, we’ll sell this year.”

But most expect it will take some time before assets start flowing out of Sareb. “It’s early days; it will take a lot of time to get the system, process, procedures and pricing in place,” one fund manager says. “Spanish banks outside Sareb might start selling before that, as we’ve seen in Ireland.”

BBVA is close to selling its latest ‘Camelia’ package of around €500m of defaulted home mortgages, to Lone Star, at around a 70% discount, after months of negotiations. One investor says the bank “is taking some pain, but slowly”. The deal will be one of an estimated €4.15bn of anticipated sales in the first half of this year (see table).

Foreign banks continue to cut their Spanish exposure. This month AIB finally shifted its €400m participation in a €1.6bn senior loan secured by more than 1,100 Banco Santander bank branches, which it first tried to sell 18 months ago.

Despite complicated legal issues relating to the assets’ enforcement rights, AIB received more than 25 bids from hedge funds and private equity firms, eventually selling the syndicated position to a group of hedge funds at a 20% discount.

The collateral in this deal is relatively low-risk, as Santander is a long-term tenant, but the loan is in default and there is also €300m of mezzanine secured on the assets, acquired at the top of the market by a Sun Capital consortium, according to CoStar.

Distressed property opportunities abound

There are plenty of distressed opportunities as a result of massive overdevelopment prior to Spain’s property crash.

An increasing number of investors are spending time in Spain examining deals. Cerberus, Orion Capital, Morgan Stanley, Fortress and Värde Partners reportedly sniffed around the BBVA portfolio, while KKR is helping restructure a couple of property deals with financing problems, by buying into the mezzanine, convertible or preferred equity elements.

Sareb begins tough task of working out Spain’s property debt problems

Sareb, the ‘bad bank’ recently set up by Spain’s government and run by former ING banker Walter de Luna, will ultimately hold between €55bn and €90bn of bad real estate loans, properties and land.

It was set up to help restore stability to the banking sector following the country’s massive property crash. Its formation was also a condition for four nationalised Spanish lenders – Bankia, Catalunya Banc, NCG Banco and Banco de Valencia – receiving €37bn of European aid last year.

This month, Sareb started marketing its first properties – 15,000 homes once owned by Bankia and NCG (see panel below).

Next month, a second group of solvent banks with lower capital needs – BMN, CEISS, Caja3 and Liberbank – is due to start siphoning off bad property assets from their balance sheets to Sareb, at discounts of 45% for loans and 63% for foreclosed properties, in return for state-backed bonds.

Eventually, Sareb will have €5bn in equity, at least €2.6bn of it from private investors, mostly in the form of subordinated debt. The bank has been capitalised by 19 investors, including all Spain’s main lenders, with the notable exception of BBVA, plus non-Spanish investors AXA, Deutsche Bank and Barclays.

It is targeting a 14-15% annual return on equity over its 15-year lifespan. For some investors in the vehicle there is an element of obligation, but others hope their participation will unlock investment opportunities.

Sareb is said to have rejected Cerberus, Fortress and Centerbridge as investors because they wanted first choice on portfolios of finished buildings offered by the bank, and on supplying services to it.

Meanwhile, some say BBVA was right not to invest in Sareb because of doubts about the bank’s potential profitability; it is hard to see how it will make money by selling property loans or assets in a depressed market, besides the fact that land and unfinished projects could be hard to sell.

The logistics of how Sareb will manage bad loan and asset disposals are unclear, with the question of how loan sales will eventually be financed up in the air.

Sareb may initially have to rely on teams at Bankia and other investor banks to keep managing their portion of toxic assets while it prepares loan portfolios for sale.

Moor Park reports interest from international buyers for Banco Sabadell bank branches it is selling, which it bought with Och-Ziff in 2010 (see Moor Park profile).

Other investors are waiting for Spanish pricing to fall further, the latest ULI Emerging Trends Europe report says. One respondent said it might even “lose appetite for Ireland quickly if Spain gets priced right”.

Spanish banks are estimated to have €350bn of commercial real estate exposure. Most of their problems relate to the large proportion of the debt that is residential-based. Prices have already fallen 30% on average and could drop a further 20-30%.

Bid/ask spreads may have narrowed, but banks are still holding assets at unrealistic values. “Some assets in Madrid and Barcelona held at 5% and 6% yields should be at 7% and 8%,” one fund manager says. He adds: “We are holding talks with banks, but they’re not there yet.”

So there have been few Spanish deals in the past two years and some have collapsed because of wrong pricing. Low bids caused Eurohypo to pull the sale of its €400m Project Sol loan portfolio in December, for example.

Santander’s initial attempt to sell a €700m residential loan portfolio to Morgan Stanley last year also fell apart, in that case because of concerns about Spain’s economy.

Spain’s more opaque market makes access to deals more complex than in other countries. Most buyers source deals through existing relationships with vendors, not through agents. For some, less opportunistic, investors, Spain is a tough sell altogether.

“If it goes wrong I don’t know how you’d explain it to investors; they’d say ‘didn’t you read the papers?'” says one investor focused on London, Paris, Munich and Berlin.

Spain’s property market has been likened to Ireland’s, in that deals are starting to take place again (see Irish property market special report, January 2013). But one fund manager asserts: “it is not Ireland”, because there has not yet been as vast a restructuring of the banking system and the macro-economic situation is more complex.

Pockets of recovery

However, tourism is back to pre-crash levels and pockets of Spain are doing well, said Pedro Barcelo, Patron Capital’s managing director for Spain, at a recent IIR Private Equity Real Estate conference. The market has improved since November and the cost of sovereign bonds has tightened, he added.

But, crucially, unemployment remains high, at about 25%. This means “you’ve got to do more underwriting of fundamentals”, adds the fund manager. Barcelo said investors that buy Spanish housing at distressed prices can still make money – but should be careful to pick the right micro markets.

Banks are starting to make provisions for bad property debt, but will have to do more, and the market looks set to keep falling for another 18 months. One private equity investor sees “limited movements in Spain; there is a year or two of pain and restructuring to come”.

Another expects more deals in 2014 and 2015 once pricing falls further. “This year people will do a lot of analysis, but not a lot of buying,” he says.

No fire sales, vows ‘bad bank’, as first assets hit market

The 15,000 residential properties Spanish ‘bad bank’ Sareb started marketing this month – 13,000 from Bankia and 2,000 from NCG – are the two banks’ better holdings, mainly newly built or secondhand properties. Bankia’s are scattered across Spain and each valued at over €100,000; NCG’s are mainly in Galicia and Catalonia.

The properties are being marketed at prices similar to those they carried before Sareb took control of them. Sareb sees no reason why these assets should be sold more cheaply than other, similar properties being sold by other organisations.

The bank’s average discount on the assets transferred to it was 53%, so it is trying to allay fears that it will conduct a fire sale that will cause house prices to tank further. “We do not intend to destroy the market,” says Sareb president Belén Romana. “We will sell assets when we consider the time is optimal and will not prejudice the market.”