Spain’s new bad bank, dubbed Asset Management Company (AMC), will transfer around €100bn to €110bn in foreclosed real estate assets and defaulted loans in the first two waves of acquisitions at carrying value of between €50bn to €55bn, reflecting a blended discount of 50%.
SAREB’s mandate – the Spanish-language acronym for the AMC – is to work through Spain’s dormant foreclosed real estate, development land and defaulted property loans has an estimated timeline of 15 years, in a “bad bank” structure similar to Ireland’s NAMA, with an equity stake holding equivalent to 8% of the asset base at transfer price.
According to the provisional business plan by Spain’s Fund for the Orderly Restructuring of the Banking Sector (FROB), haircuts on transferred real estate assets will be circa 50% against Royal Decree-Law provisions of 38%. The business plan contemplates the ROE for SAREB will be 14-15% under a “conservative scenario”.
The 8% equity held will be equivalent to circa €4.2bn in this first stage rising closer to €5bn once all assets are transferred later in 2013. More than 50% of this equity will be held by private investors, with non-participating listed banks the most likely candidates.
SAREB will buy repossessed assets at an average 63.1% haircut and loans at 45.6%, taking the blended discount to 50%, broadly in line with Oliver Wyman’s adverse scenario, which published a top-down stress-testing exercise in June 2012 covering the 14 banking groups which represent approximately 90% of the total domestic credit of the Spanish financial system.
Yesterday Fernando Restoy, the head of Spain’s FROB, described the discounts as “conservative” but attractive enough to attract outside investors to the country’s deeply depressed real estate sector to become shareholders in the bad bank, but not so low as to cause bigger losses for the banks selling the assets.
By asset type, the discount is 79.5% for land; 63.2% for unfinished developments and 54.2% for finished housing. The average discount in the case of loans to developers is 45.6%, including haircuts of 32.4% for finished projects and 53.6% for loans to finance urban land.
“We believe this is positive for accelerating the clean-up of the system, but could imply additional provisions for the listed banks,” wrote Morgan Stanley’s Alvaro Serrano and Sara Minelli in a research note this morning.
Serrano and Minelli continued: “Among the objectives set out in the law is that SAREB will avoid creating market distortions in its disposal process, which, together with the fact that its expected life is 15 years, leads us to believe fire sales will not happen.”
The acquisition of foreclosed assets and loans – which cannot exceed an aggregate carrying value of €90bn – will transfer assets worth €45bn by 1 December from the Spain’s nationalised entities, the “group one” lenders.
Thereafter, the “group 2” lenders – which benefit from government aid – will transfer additional assets and loans by the end of the first quarter, taking the gross nominal value to between €100bn and €110bn, estimates Morgan Stanley.
Consistent haircuts across are unlikely, given the wide quality spectrum in asset quality in assets and loans held by differing lenders. Spanish banks, for example, are currently quoting discounts of between 36% and 44% in their sales compared with average haircuts of 54% on finished repossessed assets, Morgan Stanley wrote.
“Having said that, given its size, and the marks on its assets, [SAREB] is likely to put further pressure on real estate prices,” wrote Serrano and Minelli.
“Applying the same haircuts (a worst case scenario) would produce additional provisions ranging from 3% to 19% of 2013E TBV (tangible book value). Given the haircuts are closer to Oliver Wyman’s adverse scenario which only required 6% of core capital, we believe more public aid for the nationalized banks is also a possibility.”
The assets transferred will include repossessed assets worth more than €100k, real estate loans over €250k and stakes in companies deriving from non-performing loans (NPLs), which is estimated to account for circa 90% of the real estate assets in value terms.
Ireland’s NAMA, set up in 2010, acquired €74bn in real estate loans from five principal banks, for €32bn, reflecting a blended discount of 58%, but the bad bank has struggled to offload the most distressed low or non-income producing assets.
With investors favouring the strongest income-producing assets, bad banks run the risk of reducing their revenue stream as the work their way through their portfolios.