This content is from: Local Insights

Winds of change in Spanish distressed debt

Iñigo de Luisa

After more than four years waiting for large distressed debt transactions to emerge in Spain, several significant deals are now in progress and others are in the pipeline.

Indeed, it has been a quite disappointing process for those funds and investors interested in purchasing non-performing loan (NPL) portfolios, particularly those based in London, visiting Spain regularly, learning about our regulation and not being able to score after many meetings with Spanish financial institutions representatives.

The main issue at that stage was the gap in the price between sellers and buyers. Several factors were to blame for this previous situation, among them: the accounting policy for provisions required by the Bank of Spain for defaulted loans; the value of the real estate collateral on the books; the traditional reluctance of the sellers; the financial crisis understood as a short-term process; and the close relationship between financial institutions and their debtors/clients.

The scenario has recently changed dramatically for Spanish financial entities. They are in need of immediate funding and they want to get rid of NPL assets from their balance sheets due to increasing pressure from the accounting rules (assessment/valuation, provisions, capital ratios).

In addition, the value of the assets is declining in a never-ending process in which excess of portfolios on sale from several entities is expected. Finally, financial entities are terminating their reorganisation processes (mergers and conversions from savings entities into banks) and the market is now mature enough for these transactions.

As a result, we have both mortgage loan portfolios and unsecured loans to be sold in a rush at a significant discount – Spanish financial entities need these transactions to be executed before the end of the calendar year in order to have them reflected during this tax year. Servicing entities have prospered by providing services in due diligence, court claims and judicial enforcement processes.

Law firms are also prepared to assist in these transactions keeping in mind that the transfer should avoid any consolidation risk and taking care of data protection regulations.

To make it even more challenging, new legislation has recently been enacted amending the Spanish insolvency law and the enforcement process of mortgages. The new Spanish government emerging after elections held this month will also enact new pieces of law as a matter of urgency, and these will surely accelerate this unavoidable process.

It is clearly time to visit Spain again and invest in distressed debt at a significant discount.

Iñigo de Luisa

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