SAREB risks losing momentum by abandoning NPL sales altogether

Spain’s ‘bad bank’ will not put large portfolios of toxic assets up for sale, despite high demand from investors. This refusal might be unnecessary.

SAREB, which currently holds almost €22 billion of non-performing loans on its balance sheet, has decided to stop putting large NPL portfolios up for sale. The reason? The numbers do not add up, it claims.

Last year, the Spanish ‘bad bank’ suffered net losses of €878 million, 55 percent greater than those in 2017. This was down to a 41 percent drop in the margins generated by selling loans, and the higher costs of its debt, which rose by 22 percent.

Losses linked to the sale of NPLs were a result of “tough competition” in the market, executive chairman Jaime Echegoyen said during a presentation of the bad bank’s annual results on 28 March.

Investment banking firm Evercore, which monitors the loan sales market, said that Spanish banks’ efforts to reduce their NPL stock – a result of increased regulatory pressure – had led to the sale of almost €100 billion of NPLs and bank-owned properties over the past two years. It added that the total for the previous two years had been €19.5 billion.

Loan sales were ramped up after Santander in 2017 closed its joint venture with Blackstone to tackle €30 billion of Banco Popular’s distressed real estate assets. Megadeals followed last year, the largest being CaixaBank’s sale of 80 percent of its real estate assets to private equity firm Lone Star in a transaction that reflected a gross value of €12.8 billion to the bank’s assets.

This boom in NPL sales has led to portfolio discounts of up to 70 percent, a reduction that SAREB “cannot and should not agree to”, Echegoyen said last month. And so instead of selling NPLs, the strategy now is to prioritise and accelerate the conversion of loans into “real estate-owned” assets via foreclosures. This in turn is expected to provide liquidity to the bank’s portfolio and facilitate property sales as Spanish real estate values improve.

As part of its new strategy, SAREB will focus on creating value for its real estate-owned assets. Last week, for instance, the bank announced a partnership with another US manager – Värde Partners and its developer, Aelca – to manage and develop plots of land and works in progress for residential projects, valued at more than €800 million.

But while SAREB pins its hopes on value creation, the bank’s decision to stop selling sizeable NPL portfolios means it risks missing out on the high investor demand for such loans in the current market.

A market source said that major opportunistic investors, encouraged by the recovery in the Spanish real estate market, have been eager to buy large portfolios of toxic assets, requiring average discounts of 60 percent on the nominal value of the loans.

A crucial consideration is that SAREB has a target of divesting €50 billion of property assets and loans it acquired back in November 2012 by the end of 2027. In the last six years, the bank has got rid of 30 percent of these assets. It seems that meeting its targets will prove challenging – if not impossible – for the bad bank while it is leaving sales of large NPL portfolios to one side.

SAREB cannot rely on selling properties piecemeal directly into the market. Although creating value and selling properties might boost its coffers on a relative basis, the sale of loans to institutional investors should remain a complementary strategy if the agency is to offload its toxic assets within its intended timeframe. Given today’s improving market conditions, perhaps it can do so at less discounted pricing than before.

The bad bank should strike the right balance between creating value in the parts of its portfolio that are too good to offload in bulk, while taking advantage of investor demand for NPLs in order to ratchet down the size of its balance sheet.

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