This content is from: Local Insights

Spain: Sareb’s portfolio success

Carmen Arribillaga SorondoAlicia Galindo Aragoncillo
The end of the year was extremely busy but successful for the so-called Spanish bad bank, the management company for assets arising from the banking sector reorganisation (Sareb – Sociedad de Gestión de Activos Procedentes de la Restructuración Bancaria). This was due to the sale of several portfolios comprising a large volume of credits (including credits to developers and office buildings and subsidised social housing units), loans (both performing and non-performing) and real estate owned to international institutional investors.

These portfolios were carefully selected and structured by Sareb's business team together with external financial advisors to maximise its value. The portfolios were offered to institutional investors in an open competitive process in which they had access to all information through a virtual data room to analyse independently, to then place their binding offers. Many of these transactions (for more than €850 million, or $1 billion, in total) were completed at the end of the year due to their complexity and negotiation process.

In general, the process starts with a selected number of investors being invited by Sareb, and the participants enter into a confidentiality contract whereby they accept the applicable process rules of the project. After a preliminary financial analysis, an initial assessment of whether the investment on the portfolio is a potential opportunity is made by the participant and a non-binding contract is set out.

Normally, once the investor has decided to continue with the process and submits a bid for the portfolio, lawyers are involved to: (i) carry out a legal due diligence of the loan portfolios as well as any collateral-assets that secure the loans; and, (ii) provide a mark-up of the sale and purchase agreement including the terms and conditions according to which the investor would be willing to acquire the portfolio.

The main obstacles that potential investors and their advisers usually face are the lack of accurate information and documentation related to the assets and the discrepancies that arise from the due diligence review carried out. The fact that Sareb is neither servicing nor managing the loans (assets have been managed by the original transferring entities) limits the capabilities of Sareb to provide more information or to obtain comfort on the available data.

After the evaluation of any potential contingency arising from the due diligence process, the prices for each asset (included in the bid letter) will be adjusted accordingly. Sareb also has minimum sale prices, so if these levels are not achieved, Sareb will not sell.

Once two or three investors are selected as finalists for the last stage of the process, Sareb starts negotiating the sale and purchase agreement with them. Price is important, but the documentation and capacity to close the deal in time are also main drivers for Sareb's decision. The principle that will govern the whole negotiation is that Sareb will only be entitled to provide the investor with the information and documentation that it has been provided with by the transferring entities. Representations and warranties and any of Sareb's undertakings will follow this key principle, so the investor should know that usual representations, warranties and undertakings will not be granted by Sareb in this type of process. Investors should also accept that Sareb's potential liability would be limited by certain parameters.

After the execution in counterparts of the sale and purchase agreement, usually as a private document within five to seven days from the award, a final period of a week to 10 days is fixed to close the transaction and execute all the individual transfer deeds and any related documentation before a Spanish notary public. The payment of the price and the delivery of the original documentation related to the assets will be the final steps to close the transaction.

At the end of the day, through the sale of the portfolios, Sareb is closer to reaching its goal of divesting its assets, for which it has been awarded a timeframe of 15 years. So far so good: international investors continue to look to Spain for attractive opportunities and the expectations of Sareb's new portfolios in the pipeline for 2015 are also very promising.

Carmen Arribillaga Sorondo and Alicia Galindo Aragoncillo

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