Legal regime update: SAREB and FABs
By the end of March a new regulation was approved in respect of protection to holders of hybrid instruments and other financial measures. The Spanish authorities have taken the opportunity to include in this new regulation certain amendments to the legal regime applicable to the transfer of assets to SAREB and Bank Assets Funds (FABs) in order to clarify and provide legal certainty to such transfers. In particular, this new regulation sets forth that:
- Credits transferred to SAREB or to FABs will not qualify as subordinated in the case of insolvency of the relevant assigned debtor, even if SAREB or the FABs are shareholder of the debtor, except if the credit had already been qualified as subordinated prior to the transfer of the debt. This amendment has been introduced as the general rule under Spanish insolvency law is that credits owned by creditors specially related to an insolvent debtor (i.e. holds at least 10%, or 5% if a listed company, prior to the origination of the credit) rank as subordinated in case of insolvency of the debtor. Spanish Insolvency Law also presumes that assignees of such aforementioned credits are also specially related to the debtor, and thus subordinated, in case the relevant credits were assigned within 2 years prior to the declaration of insolvency of the debtor.
- SAREB and the FABs shall also benefit, in respect of the assets acquired, from the regime on netting agreement and financial collateral contained in RDL 5/2005, which is the Spanish legislation implementing the financial collateral Directive. The benefit of this regime is generally restricted to certain financial institutions.
- SAREB and the FABs may be beneficiaries of mortgages created according to article 153 of the Spanish Mortgage Act (the so-called hipotecas de máximo), given that Spanish law only recognises credit institutions and public administrations as beneficiaries of this type of mortgages.
However, the Government has not taken this opportunity to develop or provide guidance on the basic features of the FABs that were approved back in November (in this respect, see our previous Alert). Therefore, so far, there are no news as to the structuring and legal regime of FABs. In particular, nothing has been clarified yet with respect to the application of the temporary tax benefits to FABs and its foreign investors. In this connection, it remains unclear whether the application of such tax benefits requires the Spanish Fund for the Orderly Restructuring of the Banking Sector (FROB) or SAREB to have exposure to the FABs and, if so, what form should this exposure take.
The European statistical agency Eurostat has just confirmed that SAREB shall not qualify as a public administration and thus the Spanish Government shall not include SAREB’s indebtedness within the Spanish public debt.
Completion of the capitalization of SAREB
By the end of February SAREB completed its initial own funds needs with the subscription by 4 insurance companies of EUR 17 million of subordinated debt.
As a result of this, SAREB has raised a total EUR 4.8 billion of capital (75% subordinated debt and 25% share capital) being 55% owned by private investors and 45% by the FROB.
So far 27 private investors participate in the capital of SAREB, including 14 national credit institutions (e.g. Banco Santander, Caixabank, Banco Sabadell, Banco Popular), 2 foreign credit institutions (Deutsche Bank and Barclays Bank), 10 insurance companies and an electric company.
SAREB´s assets
Group 2 transfer of assets
By the end of February, SAREB acquired the assets from the so-called Group 2 entities, i.e. BMN, Liberbank, Caja3 and CEISS (entities not nationalized but needing public aids). The aggregate value of assets transferred from this group of entities amounted to EUR 14.1 billion (transfer price).
As a result of this, and together with the EUR 36.7 billion assets of Group 1 entities (Bankia, CatalunyaCaixa, NovaGalicia and Banco de Valencia), SAREB has received from the Spanish banking sector a total EUR 50.8 billion of problematic assets (transfer price). Such assets had a total gross book value of EUR 106.6 billion (which means that assets have been transferred with a 52% average discount) and include 107,000 real estate assets (where 76,000 are empty, 6,300 are rented and 14,900 are land) and 90,600 loans and credits.
See below a table describing the assets transferred:
Assets | No. of units | Value (million EUR) | % Balance |
Land REOs | 14,859 | 3,801 | 7% |
Land loans | 8,642 | 8,323 | 16% |
Total loans | 23,501 | 12,124 | 24% |
Product in progress REOs | 4,025 | 637 | 1% |
Product in progress loans | 3,924 | 2,878 | 6% |
Total products in progress | 7,949 | 3,515 | 7% |
Completed product REOs | 87,972 | 6,92 | 14% |
Completed product loans | 61,702 | 21,752 | 43% |
Total completed products | 149,674 | 28,672 | 56% |
Other loans | 12,838 | 4,561 | 9% |
Unsecured loans | 3,512 | 1,909 | 4% |
Total other loans | 16,350 | 6,471 | 13% |
TOTAL | 197,474 | 50,781 | 100% |
*Source: SAREB website
Changes in initial haircut
SAREB has also made public the actual haircut value applied to transferred assets showing that the average haircut effectively applied has been higher than the one initially announced back in October by the FROB.
This reduction in the transfer price aims to increase SAREB’s profitability in order to assure the annual rate promised to investors included in its business plan (around 13-14%). In this respect, SAREB’s aim is to market assets for a minimum selling price 25% higher than their acquisition price.
Also due to a more reduced asset transfer value, SAREB has required less effort in order to cover its capital needs.
The following table shows the haircut initially estimated and the effective haircut finally applied to problematic assets.
Type of Asset | Initial haircut | Effective haircut | Type of Asset | Initial haircut | Effective haircut |
1. Loans | 45.60% | 49% | 2. Assets awarded | 63.10% | 66% |
1.1 Completed housing | 32.40% | 32% | 2.1 New housing | 54.20% | 49% |
1.2 Work in progress | 40.30% | 43.70% | 2.2 In progress | 63.20% | 66% |
1.3 Urban land | 53.60% | 63.80% | 2.3 Land | 79.50% | 79% |
1.4 Other land | 56.60% | 62.50% | |||
1.5 Other secured | 33.80% | 35.60% | |||
1.6 Other unsecured | 67.60% | 70% |
*Source: SAREB public information
SAREB’s Business Plan: forecasts and strategies
Following instructions from the European Commission and the International Monetary Fund (IMF), SAREB has recently approved the business plan for its 15 years lifetime.
Above all, the plan sets the guidelines for the divestment of the EUR 50.8 billion of assets transferred to SAREB. In this respect, during the first 5 years SAREB expects to dispose of almost half of its REOs’ portfolio (which means approximately 42,500 units) and to repay 49.9% of the senior debt (debt held by the credit institutions that transferred the assets). In fact, the Spanish Ministry of Economy & Competiveness expects to close 2013 with sales of more than EUR 1.5 billion.
The plan envisages that 3/4 of the revenues will correspond to the sale of real-estate assets and the remaining to loans. Revenues from the rental of properties are also foreseen in the business plan.
The estimate profitability for investors has been set around 13% and 14%.
Conflicts of interest
Furthermore, SAREB has approved a Conflicts of Interest and Related Transactions policy which aims to protect the entity´s interest in the decision making process from any potential conflict of interest in its governing body. Although yet to be published, the said policy prevents Board members that may potentially be affected by a conflict of interest from accessing sensitive information and decisions. SAREB has also set out a specific on-going reporting regime for the prevention and detection of conflicts of interest.
Due diligence process
Once all problematic assets have been transferred to SAREB, a team of 14 advisors have been appointed to conduct a due diligence review of all assets.
The firm CB Richard Ellis will lead a group of 5 companies who have been tasked with the real estate valuations. Gesvalt, Savills, Knight Frank and Cushman & Wakefield complete the team.
The preparation of transfer pricing studies has been mandated to KPMG while IBM will be in charge of systems and databases.
The due diligence review shall be concluded before the end of the first half of the year.
