The Orderly Bank Restructuring Fund (FROB) today completed the presentation of the structure and design of the Asset Management Company from the Bank Restructuring (Sareb), provided for in the Memorandum of Understanding (MoU) agreed between the Spanish authorities and international on July 20. This company has been designed so that the transfer of problematic assets related to the real estate sector by the entities is made on the basis of prudent valuations, in order to ensure the profitability of the company throughout its 15 years. maximum life.
The creation of the Sareb will substantially reduce any uncertainty related to the viability of the entities that require public aid, allowing management to concentrate on its core business.
The MoU establishes that the assets related to the real estate sector of banks that need public support must be transferred to an asset management company, whose general scheme and legislative framework will be specified by the Spanish authorities, in consultation with the European Commission (EC ), the European Central Bank (ECB), the European Stability Mechanism (ESM) and the International Monetary Fund (IMF). The Royal Decree-Law 24/2012 of restructuring and resolution of credit institutions and the Draft Royal Decree, which has been in the public hearing phase until last week, specify the details of the Sareb, which must be in operation in November 2012. Sareb will be established as a profitable company that will not form part of the Public Administration sector.
The overall objective of Sareb will be the orderly management and divestment of the portfolio of assets received, maximizing its recovery, over a 15-year time horizon, the maximum term of life established for this company. In carrying out its activities, it must contribute to the improvement of the financial system, as well as minimize the use of public resources and the possible distortions in the markets that it may cause.
The design and start-up – including the legal, financial structure, operating model, business plans and divestment – is being carried out by the FROB, with the advice of the international firm Álvarez & Marsal and in close collaboration with the Banco de Spain and the Ministry of Economy, as well as with the mentioned international authorities.
1. Structure and governance of the Sareb
Initially, there will be a single company or corporate legal vehicle that, subsequently and depending on the management decisions made by its management bodies, will have the power to set up specific asset funds based on the portfolios transferred by the banks.
Sareb's own resources will be approximately 8% of the total assets volume and its capital structure will be made up of a non-majority participation of the FROB and another, majority, which will correspond to private investors. A part of the own resources could be instrumented by subordinated bonds.
The banks that transfer their assets cannot be shareholders of Sareb nor will they be represented in its administrative body. In consideration for the assets contributed, the entities will receive bonds issued by the company and guaranteed by the State.
Sareb's governing bodies will be those established in the Capital Companies Law for corporations, with the following characteristics:
- The Board of Directors will have a minimum of 5 members and a maximum of 15, who must be people of recognized commercial and professional honor, qualities that must also be met by the general or similar directors of the company. At least a third of the members of the Board of Directors will be independent.
- An Audit Committee and a Remuneration and Appointments Committee, made up mostly of independent directors, will be mandatory. In support of the work of the Board of Directors, Sareb must have management, risk, investment, and asset and liability committees.
- Additionally, there will be a Monitoring Committee, outside the Sareb structure, of four-part composition (Ministry of Economy and Competitiveness, Ministry of Finance and Public Administrations, Bank of Spain and CNMV), to monitor compliance with the general objectives by those that constitute the society. Among its functions will be the analysis of the business plan and its possible deviations, as well as the monitoring of the divestment and amortization plans of the guaranteed debt. This Commission will request from Sareb the periodic information it deems appropriate.
2. Scope of assets and transfer price
As foreseen in the roadmap for the restructuring process of the banking sector, all the banks classified in Group 1 (BFA-Bankia, Catalunya Banc, Novagalicia Banco and Banco de Valencia) will transfer the following categories of assets to the Sareb in December 2012:
- Foreclosed assets with a net book value of more than € 100,000.
- Loans / credits to real estate developers whose net book value exceeds € 250,000, calculated at the borrower and not the operating level.
- Control business holdings linked to the property developer sector.
Later, once the composition of Group 2 is determined (banks that will require recapitalization with public support) and their restructuring plans are approved, these banks will transfer the same asset categories to Sareb, as early as 2013.
The volume of assets to be transferred to Sareb – taking into account only the part corresponding to Group entities 1- is estimated at 45,000 million euros. This will increase after the incorporation of the assets of the entities of Group 2 in 2013 but, in no case, as established by the Royal Decree currently being processed, will it exceed 90,000 million euros.
To determine the value of the assets to be transferred, it will be necessary that, prior to their transfer, all the relevant downward adjustments have been made, including those provided for in Royal Decree-Law 2/2012, of February 3, and 18/2012, of May 11.
The transfer value it will be based on two components. First, the economic value of the assets will be determined, both for the foreclosed assets and for the loans related to the developer sector. For this, the expected losses in the base scenario of the exercise will be used as a reference bottom-up carried out by Oliver Wyman for each of the entities that transfer assets, whose value is very close to the net value of the assets after the application of Royal Decrees 24 and 18/2012. Secondly, the estimate of the economic value will be adjusted by applying a discount for the characteristics of the transfer of assets to Sareb. This is, as a consequence of aspects such as the block acquisition of assets, the consideration of certain expenses that were borne by the entities' income statements and that must now be assumed by the company, such as management and administration costs. of assets, including financial ones, the temporary prospects of divestment of the assets transferred to it or other factors that affect the viability and risks associated with the specific activity of Sareb. These adjustments to the economic value of the assets to be acquired by Sareb prevent transfer prices from being used for the valuation of bank assets that have not been transferred to Sareb.
The transfer value, taking into account the aforementioned cuts, is very tight. On average, it represents approximately a 63% discount in relation to the gross book value for the foreclosed assets. By types of assets, the discount is 79.5% for the land; 63.2% for ongoing developments and 54.2% for finished homes. In the case of loans to developers, the average discount is 45.6%, including cuts of 32.4% for projects already completed and 53.6% for loans to finance urban land.
Therefore, this transfer value does not determine the economic value of the assets linked to the real estate sector that the Spanish banking entities keep in their balance sheets, since it will include concepts derived from the transfer to Sareb itself already mentioned.
3. Provisional Business Plan
Based on the perimeter of the assets to be transferred and the transfer price, a provisional business plan for Sareb has been designed for a time horizon of 15 years, which contemplates the macroeconomic and financial evolution of the Spanish economy and the real estate market in particular, considering the market absorption capacity depending on each type of asset and the region in which they are located.
In general terms, the company will have three main sources of financing: (i) "senior" debt guaranteed by the State that Sareb issues as a counterpart for the assets received from the banks that transmit them and subscribed by them; (ii) perpetual subordinated debt and (iii) ordinary capital. Both perpetual debt and ordinary capital will be partially subscribed by the FROB and the majority will be subscribed by private investors.
The expected return on capital (RoE) for the project as a whole in a conservative scenario is estimated at around 14-15%. The characteristics of the Sareb business, the complex macroeconomic environment and the maturation of said business in the medium term make the aforementioned average profitability for the Company's equity instruments over the 15 years compatible with modest results in the first years when a high asset stock has to be financed, yet sales still represent a small part of that stock.
In accordance with this business plan, Sareb will become a profitable company thanks to efficient and professional management of the assets that will be transmitted to it by financial institutions and that will be carried out by the management team selected for this purpose among professionals and experts. of recognized prestige.
The draft of the provisional business plan will be discussed with potential investors in the coming days and approved by the governing bodies of the company itself, once it is legally constituted.
Sareb will be fully operational after the approval of the Royal Decree that establishes the legal regime of the asset management company and the transfer of assets by Group 1 entities in December.