Inside Netherlands’ €4.8bn bad bank Propertize

The State of Netherlands has completed the nationalisation of SNS REAAL’s troubled property finance division, transferring €4.8bn in predominantly Netherlands commercial real estate investment and development loans to a newly-established bad bank, named Propertize.

PropertizePropertize – a somewhat clichéd verb invention intended to signify the bad bank’s mandate to “maximize and monetize property assets” in the interests of the Dutch tax payer – has a mandate to run-down the €4.8bn loan portfolio over the next eight to 10 years.

While Propertize is expected to run-down the European commercial property loan bad bank over this full mandated life time, future loan sales and loan portfolio sales have not been ruled out.

A spokesperson at Propertize said: “At this point nothing is ruled out; we have an assignment to run down the loan portfolio over next eight to 10 years. But in the end, different scenarios are possible. Loan portfolio sales [in future] are not ruled, but it is not currently in focus now.”

The former SNS REAAL Property Finance division has fallen from a high of €16.0bn, as at the end of the first half of 2009, to the €4.8bn transferred to Propertize on 30 December 2013, via the transfer of shares in SNS REAAL’s Property Finance to NL Financial Investments, the government-controlled agency which manages shareholdings in nationalised Dutch banks.

But this mammoth two-part €2.8bn gross write-down of the €7.6bn European property loan book, as at 30 June 2012, remains somewhat contentious.

In the second half of 2012, Cushman & Wakefield was commissioned by the Netherland’s Ministry of Finance to value the loans and underlying properties in SNS REAAL €7.6bn European loan book, and did so employing the “real economic value” (REV) methodology.

A counter valuation was also commissioned, by SNS REAAL, to Ernst & Young, with the findings materially different.

On 14 December 2012, Cushman issued a first report stating that SNS REAAL’s write-down should be €2.4bn, according to its base scenario. By contrast Ernst & Young’s base scenario suggested a write-down of €1bn.

Cushman and Ernst & Young’s “gloomy scenarios” indicated write-downs of SNS REAAL’s property loan book by €3.2bn and €1.9bn, respectively, underlying enormous differences between the two independent real estate experts.

By 1 February last year, Cushman’s base scenario capital shortfall rose by €400m to €2.8bn and was adopted, over Ernst & Young’s by the Ministry of Finance, supported by the De Nederlandsche Bank (DNB), the central bank of the Netherlands.

This enabled the Dutch State to buy the defaulted property loan book at a significantly greater discount to the Dutch taxpayer.

Had the Ernst & Young’s base case valuation been adopted, for example, Propertize’s loan book would be €6.2bn – 29% larger.

No breakdown of the Propertize European property loan book has yet been published, although the last published breakdown at the end of 2012, prior to the second of the two-part write-down had taken effect.

SNS REAAL Property Finance loan book at €6.2bn (prior to Q1 2013 gross €2.0bn write-down):

  • Netherlands: €5.1bn (82%)
  • Germany:  €299m (5%)
  • North America: €157m (3%)
  • France:  €121m (2%)
  • Spain: €71m (2%)
  • Other Europe: €412m (7%)

The end of the first half €6.2bn European property loan book total is subsequent to €0.4bn reduction arising from individual loan sales and small additional write-downs.

The balance sheet then rises back up to €6.6bn when an equal is added to the balance sheet due to a number of cases of SNS REAAL taken control of a number of failed property development schemes and assumed liabilities, known by the bank as “property projects”.

Non-performing loans increased by €0.3bn to €2.9bn, to the 30 June 2013 (prior to €2.0bn write-down), at an average LTV of 148.3%.  The €3.3bn performing loan book carried an average LTV of 85.6%.

The €5.1bn Dutch loan portfolio were 34% non-performing by loan balance, or €1.7bn, and with an average LTV of 103.4%.

SNS REAAL’s international real estate loan portfolio was €1.1bn, rising to €1.4bn when the “property projects” were factored back in, with as much as €902m classified as non-performing, or around 64%. The average LTV was 99.4%.

Background to the creation of Propertize

SNS REAAL, the Dutch financial conglomerate, has been working towards transferring its European commercial property loan portfolio to a bad bank since 1 February last year after a private equity fund-led buyout of the entire bank, orchestrated by CVC Capital Partners, was rejected by the De Nederlandsche Bank (DNB), the central bank of the Netherlands, and the country’s government.

Reaching agreement with CVC Capital Partners was complex, with the Ministry of Finance believing there an imbalance between the private equity acquisition terms on the one hand and the “distribution of authority, benefits and risks, on the other hand,” wrote the DNB last March.

As the capital shortfall in SNS REAAL’s grew larger, by €400m in the early months of last year by Cushman’s estimate, the chances of reaching agreement with CVC Capital Partners evaporated.

Plans to spin-off SNS REAAL European real estate loan book were announced on 1 February 2103, although the European Commission only rubber-stamped the Dutch authorities’ proposed restructuring of SNS REAAL on 19 December.

The restructuring of SNS Bank also included comprised of a domestic, simplified retail bank which divested its insurance subsidiary and spun-off of the troubled European commercial real estate portfolio into a bad bank.

In a statement, the European Commission said: “The plan notified by the Dutch authorities will enable the company to become viable in the long term without unduly distorting competition in the EU internal market. On this basis, the Commission has concluded that the aid measures granted by the Dutch state to SNS REAAL are in line with its rules on state aid for the restructuring of banks during the crisis.

“Because of persistent problems following the write down of its property finance portfolio, the Dutch State decided in February 2013 to nationalise the group SNS REAAL and to inject new capital. In this context, the Dutch State notified the following state measures to the Commission:

  • a €1.9bn recapitalisation of SNS Bank in the form of ordinary shares;
  • €300m recapitalisation of SNS REAAL in the form of ordinary shares; and
  • a bridge loan of €1.1bn to SNS REAAL to secure its short-term funding needs.

As part of the restructuring plan, the Dutch State will spin off the property finance activities into a bad bank “at a transfer price above the market value”, amounting to an additional aid of €859m.

The transfer price “above market value” reflects the difference between the Cushman & Wakefield and Ernst & Young loan book valuations.

The EU’s statement continued: “The restructuring plan ensures an adequate contribution to the cost of restructuring by the bank, its shareholders and hybrid capital holders. The restructuring plan also includes measures that will limit the distortions of competition resulting from the aid.”

jwallace@costar.co.uk

About CoStar News

Finance Editor, CoStar News
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