Revisions to Spanish insolvency law designed to curb the scale of liquidations across the broader economy is threatening to spook international investors competing on commercial real estate non-performing loans in the country.
The latest amendment to the Spanish Insolvency Act (Royal Decree-Law 11/2014, of 5 September) was described as a “bonkers rule” by law firm Dentons in a column in the Spanish press last week and one which “has totally changed the rules of the game for investors in distressed debt”.
When NPL investors seek to acquire debt in Spain, they are buying both the loan’s unpaid principal balance (UPB) and also a “privilege” on the asset or the property.
By way of a hypothetical illustrative example, if an investor buys a loan with an UPB of €100m, this comes with a total mortgage security liability with the Land Registry for typically a greater amount, reflecting the previous borrower’s purchase price, of say, €130m.
If the borrower defaults, the loan buyer is entitled to “credit bid” through enforcement over the asset as a “privileged creditor” up to the total €130m mortgage liability.
Effectively, the NPL investor was in the driving seat to acquire the asset at auction and was entitled to be repaid by rival cash bidders at auction of up to €130m.
Under the new law, if a borrower goes into insolvency, the court will appoint a receiver. The receiver will then take a view as to the loan’s underlying real estate value through valuation and revise fair value of the total mortgage liability.
Continuing with the previous example, under the new law, supposing the receiver determines by valuation that the asset is only worth €50m, the NPL investor which has acquired the nominal €100m loan would only be entitled to credit bid up to €50m, rather than the €130m.
Effectively, this law creates a new layer of uncertainty for achievable recoveries in CRE loans which end up in Spanish insolvency.
From the point of view of creditors, and NPL investors in particular, a concrete total mortgage liability has been replaced by an element of subjectivity and all the vagaries associated with valuations administered by an insolvency administrator.
This will lead to investors pricing in deeper discounts for uncertainty meaning, ultimately, vendor Spanish banks and SAREB will be squeezed down on price as the unintended consequence of this law
The government’s rationale for the Royal Decree was that they did not want creditors having an unjustified privilege, given the current market circumstances.
The second reason, more anecdotally, is that the Spanish government wanted this new law to serve as a deterrent to mortgage enforcement over “productive units” – such as, factories, hotels, residential apartments – as they will see it is less easy to recover their debt.
The Spanish legislator is trying to reverse the trend of more than 95% of insolvent companies in Spain ending up in liquidation.
This law is designed, therefore, to prevent creditors from enforcing over productive units, because if creditors are allowed to enforce, the productive units are going to be cut into pieces.
The problem is that the law that does not distinguish between apartments, hotels, productive units or land. This is the big error, experts say, and has had the immediate effect of spooking potential international investors which could lead to a deterioration in price.
Once SAREB fully realises that this could have a negative impact on the value of what they own, the bad bank is expected to be all over this issue, market sources claim.