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Spain: NPL sale trends

There have been many large non-performing loan (NPL) sales in Spain, particularly in the past five years. The trigger was undoubtedly the setting up of the Spanish bad bank (Sareb) and the transfer of €51 billion ($61 billion) of impaired assets (loans with mortgage collateral and real estate properties). Since 2012, Sareb has been very active selling NPL portfolios to institutional investors through competitive sale processes and there is still a nine-year period left to sell them all (with more than €39 billion still remaining). More recently, Sareb has launched an online platform so investors can also bid for the NPLs on an individual basis.Borrowers are also becoming increasingly interested in acquiring debt at a discount through funds from alternative providers.

Spanish financial institutions have joined this trend to reduce their balance sheet and capital costs, release provisions and improve their ratios. All Spanish banks, particularly Santander, BBVA, Bankia, Caixabank, Sabadell, Ibercaja, Abanca and Liberbank, have conducted relevant sales. Professional servicers and asset managers have also flourished in parallel in the managing of these assets, implementing tailor-made strategies for each asset in order to maximise proceeds.

Particularly important in 2017 has been the Santander acquisition of Popular and the sale of 51% of its real-estate owned (REO) and NPL portfolio to Blackstone. In addition, there are now continuing processes with a value exceeding €6 billion to be closed before year-end. For instance, according to the media, project Titan by Santander through Altamira (€400 million); project Sena by BBVA selling a portion of Anida to Cerberus (€1 billion); projects Tribeca (residential, €500 million) and Egeo (a mix of secured and unsecured debt, €660 million) by Caixabank; project Invictus (€700 million, mainly residential) by Liberbank; project Voyager (developers and hotels, €800 million) by Sabadell; and, project Ines (€500 million) by Sareb. Usual institutional investors are Oaktree, Bain, Deutsche Bank, Cerberus, Apollo, Blackstone, Lone Star, Varde, Lindorff, TPG, BAML, GS and many others.

We are also seeing more and more secondary transactions and individual sales, which are becoming attractive for certain real estate investors. However, it is also true that international investors which have been active in past years, are now starting to follow the Greek and Italian market where there are €200 to €300 billion of toxic assets ready to go. There is a good outlook for 2018 to 2019 although funds may be overweighed in Spain with an expectation that the successful track record will be repeated in another European jurisdiction. The Spanish legal framework has provided a fairly reliable position for international creditors. Other jurisdictions can learn a lesson from the Spanish model.

Eventual political risks derived from the Catalonian situation could bring additional opportunities for distressed investors, but this outcome would very much depend on the results of the regional elections foreseen for December 21.

Moreover, the good development of the Spanish economy has also been a key factor in the progressive decrease in the volume of NPLs. As held by the Bank of Spain (Banco de España) in its financial stability report published in November 2017, the Spanish market registered a 13.1% decrease in the volume of NPLs over the past year, with a cumulative decrease of 45.8% from December 2013, establishing the usual correlation between the improvement in the business cycle and the fall in NPLs.

The Spanish legal framework continues its reshaping of some key aspects of the NPL sale processes. The rights of debtors are more powerful particularly when they qualify as consumers and the applicable regulation becomes more protective (for instance, information duties for the investor, rights of first refusal at debtor and regional authorities level, and so on), and the new Spanish law on mortgage loans (recently approved by the Spanish government and to be passed by Parliament soon) will introduce limitations to early termination events of default and to the enforcement proceedings of mortgages.

From a European regulatory perspective, NPLs have also been specifically addressed by the European Central Bank (ECB), which has stepped up to the challenge in relation to their economic risk, essentially from the macroeconomics side, with the issuance of its Guidance to banks on non-performing loans in March 2017.

Even though the Guidance has a non-binding nature, it sets out a number of useful best practices for banks to responsibly manage (and decrease) NPLs, identifying the principles which constitute the basis of the ECB's banking supervision expectations, serving as a basic framework for the joint supervisory teams which carry out implementation and supervision tasks.

While it will take some time before clear conclusions can be reached on the impact of the Guidance, both its implementation and future international investment trends will surely shape the future of NPLs in Europe and in Spain.

Iñigo de LuisaGuillermo Ruiz

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