Spain remains one of the largest European markets for
non-performing assets – both for its non-performing
loan (NPL) and real estate-owned (REO) portfolios –
and is a preferred jurisdiction for international investors.
The provisioning requirements of credit institutions for real
estate exposures and the creation of the Spanish bad bank,
Sareb, were the real catalysts for the change in mindset
regarding the transfer of NPLs. All Spanish financial
institutions, even the most solvent ones, accumulated large
amounts of NPLs – around €300 billion ($347
billion) in total – during the real estate crisis and
financial turmoil. All international credit funds and
distressed investors landed in Spain several years ago and many
of them set up their own asset management platforms. During
those years, there was no other jurisdiction in continental
Europe that could offer the opportunities and returns available
in Spain (until recently, Italy).
The Spanish secured NPL market has been very active for the
past five years. The average nominal amount has been €400
to €800 million, except for a couple of situations.
However, more recently we have seen €30 billion NPL
portfolio deals and the average amount has gone up to between
€1 and €1.5 billion as evidence of this sales rush.
There has been a clear acceleration in the sale of NPLs in 2018
due to several factors, including the additional capital
requirements for NPLs, which means banks are prioritising these
sales to reduce their balance sheets and improve their ratios.
This strategy is further hastened due to the banks' fear of
competition from other jurisdictions such as Italy and Greece.
A total €40 billion in NPL sales are in process.
International credit funds, banks and institutional
investors are the usual buyers of secured NPLs. On the other
hand, Spanish banks and Sareb are the usual sellers when
dealing with secured NPL portfolios. There has also been a
limited number of secondary deals among funds, but this is
changing and secondary sales are more frequent now. In
individual situations or single names, we see other Spanish
banks increasing their debt positions, or even debtors
purchasing their own debt at a discount and refinancing, thanks
to the participation of alternative lenders.
Spanish secured NPLs hold very attractive asset collateral
and allow investors to achieve high returns, taking advantage
of the fact that the real estate market continues to grow.
Mortgage-secured NPLs are the most attractive for investors
since they have the real estate collateral assets to recover
proceeds and negotiate with borrowers, as they are generally
more flexible than banks. Most of these large investors have
their own local teams which, together with a sophisticated
servicing industry, are assisting them to take advantage of the
recovery of the real estate market in Spain and maximise
returns. Even types of collateral such as urban plots are now
very attractive, since development projects are booming.
The main NPL transactions deal with acquisitions of large
secured NPL portfolios, and their financing through
securitisation schemes are the most attractive. On the other
hand, there are substantial individual pieces on sale which
require specific tailor-made solutions, in particular, debt to
own and enforcement situations. Also popular are acquisitions
of all or a majority of the financial debt of single name
Spanish companies in order to refinance or use debt- to-equity
There is still so much in the balance sheets of banks and it
has taken so long for the institutions to sell the NPLs that
this situation is likely to continue for a few years to come.
Until now, Spanish banks have not taken an aggressive or
accelerated approach in cleaning up balance sheets. According
to public estimates, the secured NPLs in Spain amounted to
around €300 billion, and still €100 billion remains
to be sold. Sareb has been set up for 15 years, so it still has
nine years to sell it all. No doubt the Spanish economic
recovery and the improvement in the real estate market are
helping this deleveraging process.
Investors have raised substantial capital in the past two
years (sources say €300 billion) and sellers' plans to
sell will continue for at least the next two years. Key factors
are the good performance of the Spanish economy and the
recovery of the real estate market, in particular, the
residential market. Spain is for sure a preferred hunting
ground for major international investors. On the other hand,
most NPLs are real estate related and there is still a large
number of corporate NPLs waiting on the balance sheet. Thus, we
anticipate moving from property-related NPLs into the debt of
small and medium-sized enterprises. This will be the next NPL
wave in Spain and investors are already watching.
Sales of NPL portfolios are still booming. This will not be
altered by the new Spanish socialist government. On the
contrary, sale processes – both large sales and
secondaries – are speeding up. However, Sareb's
continuing sale transactions and strategies could be under
review. The Spanish market is still providing high returns but
there is a lot of competition among investors, so accurate
assessment of risks when calculating collateral value and
pricing should still be a priority.
|Iñigo de Luisa