On 31 August 2012 Royal Decree-Act 24/2012 on the restructuring and resolution of credit institutions was passed in which, following months of conjecture, first on whether the socalled “bad bank” would be created in Spain and, second, the terms of its creation, the existing doubts have only been partially clarified.
On the one side, with respect to the first of the uncertainties, we will ultimately have a “bad bank” in the form of a corporation that will be created under the name of Sociedad de Gestión de Activos (SGA or Asset Management Company,).
With respect to the second and perhaps most relevant question, a major part of the terms regarding the operation of this company will be developed in the future. To this regard, it is envisaged that the FROB may obligate a credit institution (obviously an institution subject to a restructuring process, in other words, one that has sought public financial support in the search for viability) to transfer given asset categories to the SGA that are particularly damaged or whose permanence on the balance sheet of the entity is considered detrimental to its feasibility, in order to remove such assets from the balance sheet and allow the independent management of their sale. Neither does this provide much clarity, since actually it is nothing more than the definition of “bad bank”. The most significant part of the regulatory development is pending; which is none other than determining the categories of assets to be transferred, the manner in which this is to be conducted and the price at which such transfer will take place.
At present only some general principles have been established for the process for contribution to the SGA, which are as follows:
- The transfer will take place without the need for third-party consent by means of any legal transaction and without the need to comply with the procedural requirements necessary for structural modifications of commercial companies;
- Prior to the transfer, the credit entity should adjust the appraisal of the assets according to criteria to be determined by regulation;
- Likewise prior to the transfer an appraisal will be performed by one or several independent experts of the assets to be transferred, that should follow commonly-accepted and adequate methodologies in order to provide a realistic estimate of the assets (in principle this is what would be expected of an independent report but there is no harm in making specific reference to realism in the appraisal);
- This independent expert appraisal will replace any that, where appropriate, could be required in accordance with the Capital Companies Act on the basis of how the transfer is implemented;
- In no case may the transfer to the FROB be terminated by virtue of actions for reinstatement under the Bankruptcy Act;
- In the event of the transfer of credits deemed to be under litigation, the provisions of Article 1535 of the Spanish Civil Code will not be applied (in other words, the debtor will not have the right to extinguish it by reimbursing the FROB for the price paid, legal costs incurred and interest on the price as of the day on which it was paid);
- The acquiring company will not be obligated to launch a takeover bid in accordance with securities market legislation;
- The transfer of assets will not constitute a case of succession or extension of tax or social security liability;
- The SGA will not be liable for any tax obligations accrued prior to the transfer deriving from the ownership, operation or management of the assets.
In conclusion, while it is a first step toward the creation of a bad bank, there are several uncertainties yet to be clarified; in particular, one whose clarification will take some time and which is whether this entire process will ultimately be done at the expense of the taxpayer. It will solely be possible to calculate this once the transfer price of the assets to the SGA is known and therefore, the losses are to be assumed by the credit entities (their shareholders) or the State (the taxpayers).