Any discussion of distressed assets will, almost certainly, feature Spain.
In a country where house ownership is around 80 per cent, and in which more homes were being built each year than in Germany, France and England put together, the global financial crisis decimated the real estate development market and increased the non-performing loans (NPLs) ratio from a stable 1 per cent pre-crisis to more than 10 per cent in 2012. This perfect storm saw the Spanish banks holding more than €500 billion of distressed assets at the peak of the crisis.
Thanks to a comprehensive restructuring of the Spanish financial sector, which included the creation of the Spanish “bad bank” Sareb, which absorbed more than €50 billion of distressed assets (mainly from the Spanish savings banks), and a process of bank concentration and recapitalization, the Spanish banks have been able to reduce the total volume of distressed assets to approximately €215 billion, of which approximately €85 billion are real estate owned properties (REOs).
This reduction in the volume of distressed assets has been achieved through unrelenting sales of portfolios of distressed assets, which in 2015 amounted to €15 billion. This figure is likely to reach €19 billion in 2016, and will continue to rise in order for the Spanish financial system to be able to recover from the crisis of recent years.
Although portfolio sales in Spain follow the same general process as in other countries (and in this area, credits are in general freely transferable without specific formalities, other than those applicable to the transfer of the relevant security, and REOs acquired in compliance with the land registry system), there are several important practical issues which need to be taken into account by parties acquiring distressed assets in Spain.
The main problem that investors face in these transactions in Spain is the lack of documentation. It is undeniable that during the boom years there was a lending rush which made the control systems more lenient, with, for example no checks being undertaken to ensure security documentation was complete. This issue has been aggravated by the restructuring of the banks and distressed assets portfolios.
Incomplete documentation has a direct impact on price, as it prevents potential acquirers from making an accurate estimate of how long it will take for them to obtain the collateral in the case of NPLs (if, for example, lack of the relevant notarial deed precludes foreclosure of the mortgage through the expedited mortgage procedure) or for exploiting the REOs (if, for example, the relevant REO is not registered in the name of the seller).
Bankruptcy issues are the second main problem that investors need to address when contemplating the acquisition of NPLs in Spain. Not only there is a clawback risk which lasts for two years from the date of the declaration of insolvency for actions detrimental to the bankrupt estate, but the acquirer also needs to ensure that the NPLs which are being purchased may not be subordinated, and in general to be sure of the purchaser’s position within the debtor’s existing or potential bankruptcy procedures.
After any issues of lack of documentation and debtor insolvency have been resolved, there remain several issues to consider.
Possible first acquisition and preemption rights must always be considered by parties acquiring distressed assets portfolios in Spain. In the case of an NPL, if the latter is considered a “contentious credit” the debtor may have the right to repay the debt at the discounted price paid for the NPL. As for REOs, there may be preferential rights for the benefit of possible co-owners, but it is particularly in relation to existing lessees that these rights may arise (with the added complication of the different lease regimes that may apply).
The transfer of REOs may also be affected by regulatory requirements, such as the need to have a first occupation permit in the case of residential properties located in certain regions, or the restrictions applicable to the sale of social housing.
Finally, and although this article does not attempt to consider the tax implications of acquiring portfolios of distressed assets, investors must be aware of the costs associated with the transfer of registered securities (and in particular the stamp duty applicable to the transfer of mortgages), of the various taxation implications of transferring residential properties and other real estate assets (it being especially important to ascertain whether VAT or non-recoverable transfer tax applies) and of potential taxation on interests.