Spain’s bad bank, five years on

Sareb has managed to reduce bad loans by almost one-third, but divestment of toxic assets remains behind target.

The performance of Sareb, a little more than five years since its creation, remains under scrutiny. While the Spanish ‘bad bank’ has played a crucial role in addressing some major debt problems stemming from the global financial crisis, the speed of asset disposals is behind its initial targets.

In November 2012, when Sareb acquired €50 billion of property assets and loans from nine Spanish banks, the goal was to reduce its balance sheet by 44 percent by December 2017. Today, the bank has offloaded 27 percent of its assets.

Despite not meeting its goals, Sareb closed 2017 with two significant deals. In December, the agency offloaded non-performing loans with a nominal value of €375 million to Deutsche Bank, a transaction that was followed by the sale of €150 million of NPLs to Oaktree Capital Management.

Announcing the Deutsche Bank deal, Alfredo Guitart, Sareb’s general business director, noted the transaction shows “ongoing confidence in the Spanish market”.

The expansion phase of the Spanish economic cycle – with GDP growth projected to hit 3.1 percent in 2017 – has supported the real estate market. Investment volumes in Spain reached almost €25 billion between 2014 and 2016 – more than one-and-a-half times the total volume invested between 2009 and 2013, according to JLL. Total investment in Spain’s real estate sector in 2017 stood at €13.1 billion, up by 36.3 percent year-on-year.

Spain’s real estate recovery, as well as political pressure on banks across Europe to divest non-core assets, has led to renewed activity in the loan sales market – led by Santander’s joint-venture deal with Blackstone to tackle €30 billion of Banco Popular’s distressed real estate assets and bank BBVA’s sale of an 80 percent stake in its domestic real estate business to US private equity firm Cerberus for €4 billion.

“Major investors want big loan portfolios, as we have seen in deals taking place in Spain in the past year. In Southern Europe, banks have always preferred to sell smaller portfolios: this is also the case for Sareb, which has closed most of its deals in the region of €400 million to €500 million,” says a loan sales expert who did not want to be named.

“Sareb is facing a big dilemma because there’s demand for large portfolios, but its book values are above the market value, and the bigger the portfolio, the bigger the loss,” the source adds.

Sareb has reported accumulated losses of €750 million to the end of 2016, as it has failed to sell its assets above the price at which they were originally purchased. A further loss is expected in 2017’s figures. When the Bank of Spain forced Sareb to re-evaluate their provisions at market prices in 2015, the agency had to write off just more than €3 billion worth of assets.

In contrast, Ireland’s National Asset Management Agency (Nama), generated €23.6 billion in its first five years of operation. Last October, Nama redeemed the final €500 million of its government-guaranteed debt, three years ahead of schedule.

According to law firm Cuatrecasas, the structure of Sareb’s assets is more complex than Ireland’s bad bank. Whereas Nama received only loans concentrated to a significant degree in relatively few debtors, Sareb had to cope with some 200,000 properties of various types and loans secured by another 400,000 properties. The portfolio, consisting of 80 percent developer loans and 20 percent properties, had more than 17,300 borrowers when it was created.

In addition, Nama’s debt pile backed some high-quality assets, including in strong markets such as London, which could be sold off relatively quickly after the worst of the financial crisis eased.

“While Nama had assets in more dynamic markets, Sareb only has assets in Spain. Also, Sareb started at a time when markets were completely inactive,” says Fernando Mínguez, a partner at Cuatrecasas.

Sareb’s chief executive, Jaime Echegoyen, has said the agency’s strategy is to sell those assets with less capacity for revaluation, leaving the better-quality assets – those with more possibility of increasing their valuation – for later.

“Sareb still has 10 years to continue operating according to its business plan, but big investors will remain in Spain for the next two or three years, not for 10 years,” the loan expert says. “Nama understood that the economic cycle evolves and investors wouldn’t stay forever, so they sold quickly.”

A source from Sareb says that, since its first institutional operation in 2013, the agency has consistently carried out loan and property transactions.

“The demand for loans and real estate assets has not stopped growing since our creation,” the source told Real Estate Capital, adding that five years ago, Spain was considered an opportunistic play, but now investors’ view it as more long term.