Spain: Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria (SAREB)

The creation of SAREB was a precondition of a broader aid package from European authorities to the Spanish government. In the middle of 2012, in the face of a deteriorating banking sector, Spanish authorities appealed to a European program called the Financial Assistance Programme for the Recapitalization of Financial Institutions administered by the European Financial Stability Facility (EFSF). On July 20, 2012, the Spanish government and the EFSF signed a Memorandum of Understanding, which mandated the creation of an asset management company as one of the preconditions for receiving an EFSF loan of as much as €100 billion (European Commission 2012). The Kingdom of Spain eventually received about €41.3 billion from this facility (European Stability Mechanism 2014).

The EFSF argued that an asset management company (AMC) was an indispensable component of FROB’s broader banking sector reform and restructuring mandate. The AMC would allow financial institutions that were struggling to borrow to clean up their balance sheets and lower their borrowing costs (European Commission 2012).

In addition to SAREB, Spanish authorities engaged in a number of initiatives. These included efforts to “[clean] up banks’ balance sheets; [increase] minimum capital requirements; [restructure] the savings bank sector; and significantly [increase] the provisioning requirements for loans related to real estate development and foreclosed assets” (FROB 2012).

On August 31, 2012, the Spanish government passed Royal Decree-Law 24/2012 on the restructuring and resolution of credit institutions, which among other conditions, provided “the necessary legal authority to ensure the AMC is operational by December this year” (Bank of Spain 2012).

Law 9/2012 of November 14, 2012, provided more authority and greater clarity over the rules of SAREB. Indispensable to the operations of SAREB, Law 9/2012 granted FROB the power to make a credit institution transfer to an AMC certain impaired assets or assets that were considered potentially harmful to the institution if they remain on its balance sheet. The AMC would then have the responsibility to remove those assets from the balance sheet and allow them to be managed separately (BOE 2012b). This law gave FROB the authority to compel banks to transfer their distressed assets to SAREB.

Last, Royal Decree 1559/2012 of November 15, 2012, implemented and formalized the legal regime required for Spain to establish an asset management company and included regulations specific to SAREB (BOE 2012c). In essence, while Royal Decree-Law 24/2012 had laid the groundwork for SAREB, Royal Decree 1559/2012 formally created it.

On November 14, 2012, the Spanish Secretary of State for Economic Affairs and Business Support requested an opinion from the ECB on the draft of Royal Decree 1559/2012 that would authorize AMCs (and SAREB in particular). Published on December 14, 2012, and signed by Vitor Constancio, the Vice President of the ECB, the report was largely favorable to the proposed Spanish legislation. In this report, the ECB (2012) concisely summarized the two primary purposes of SAREB, namely supporting and normalizing the banking system and recovering the value of distressed assets. It reads:

More generally, by facilitating the transfer of nonperforming assets into a separate institution, asset removal schemes such as the SAREB assist participating banks in restructuring their balance sheets, which should, in turn, improve their financial soundness. By facilitating banking sector restructuring and recovery, albeit by transferring risk from the banking sector to the State, such schemes should positively contribute to banks’ ability to extend credit and support economic recovery. In addition, the value of the distressed assets may be better recovered when consolidated and managed by independent specialists.

However, the report also raised a number of concerns about potential conflicts of interest arising from Spanish credit institutions taking ownership stakes in SAREB. It also pushed for a prohibition on public debt monetization and limitations on dividend payments (ECB 2012).

It does not appear that SAREB was granted any notable special powers to pursue its mandate.

The Memorandum of Understanding with the European Commission that detailed the plans for the creation of SAREB noted that the rapid removal of problematic assets from the balance sheets of banks was vital for the overall health of the banking sector. It continued, “[SAREB] will manage the assets with the goal of realising their long-term value” (European Commission 2012).

According to Article 3 of Royal Decree 1559/2012, which establish SAREB, the five objectives of SAREB were:

• “contribute to the cleaning up of the financial sector by acquiring assets for an effective transfer of their risk,
• “minimise public financial support,
• “service its debt and bonds issued,
• “minimise possible market distortions that could be caused by its actions, and
• “dispose of received assets optimising their value, in the required time frame” (Cas and Peresa 2016).

SAREB regularly issues press releases on its website reporting on its financial performance and promoting new sales initiatives. SAREB also maintains several independent platforms on its website that market loan portfolios to institutional investors and real estate development companies and advertise individual properties to citizens. SAREB staff have also shared their experiences and knowledge formally with a number of delegations from other countries hoping to gain insight into how to address their own NPL troubles. Among these, SAREB has shared its expertise with representatives from Kazakhstan, the State Bank of Vietnam, DUTB (Slovenia’s bank asset management company), and the Central Bank of Mongolia (SAREB 2017a; SAREB 2017b; SAREB 2018a; SAREB 2018c).

SAREB was, by design, majority privately held. Approximately 55% of SAREB was held primarily by banks and insurance companies, while approximately 45% was owned by the taxpayers through FROB. Of the 21 private investors in SAREB, 14 were Spanish banks, two were foreign banks (Deutsche Bank and Barclays) four were insurers (three Spanish and one French), and one was a Spanish electric company (Iberdrola) (see Appendix A for a full list of investors and the capital provisioned) (SAREB 2012). This ownership structure afforded SAREB a number of benefits from a legal, perception-based, and operational efficiency standpoint.

The approach by which SAREB went about soliciting private investment has been criticized, however. Some suggested that the government engaged in some arm-twisting. Aristóbulo de Juan, formerly General Manager at the Bank of Spain and senior financial adviser at the World Bank, has written that these private investors were “‘invited’ to acquire stakes by the Spanish government in an exercise in moral suasion” (De Juan 2019).

On March 26, 2013, Eurostat issued a letter in response to several letters that had been exchanged between Eurostat and Spain’s National Statistics Institute in late 2012 and early 2013. At issue was “the correct ESA95 accounting treatment of the classification of [SAREB]” (European Commission 2013).^FNThe European system of national and regional accounts, known as ESA95, established accounting norms among member states of the European Union that “made it possible to describe the total economy of a […] country […] and its relation to other total economies.” ESA95 was replaced by ESA2010 in September 2014 (European Commission 2017). The letter concluded that because of a number of features of SAREB, including its decision-making autonomy, majority private ownership, and finite lifespan, SAREB “should be classified outside the general government sector” (European Commission 2013). This was essential because it allowed the debt issued by SAREB (and guaranteed by the Spanish government) to not appear as a liability for the Spanish government on its books, even as SAREB was receiving considerable state support both in the form of a minority equity stake held by FROB and lowered borrowing costs thanks to the state guarantee of SAREB’s debt (ECB 2013).

Furthermore, SAREB could be classified as a for-profit institution with the stated purpose of delivering a profit to private shareholders and taxpayers, even in the face of its mandate to assist in the restructuring and resolution of the banking system (European Commission 2013).

To fund its asset purchases, SAREB issued €50.8 billion worth of government-guaranteed senior bonds to be used “as consideration for assets transferred” (FROB 2012). At the same time, SAREB received an initial capitalization of €4.8 billion, of which €3.6 billion was convertible subordinated debt.^FNThe remaining €1.2 billion was common equity. See Appendix B for a snapshot of SAREB’s initial balance sheet. After the 2015 revaluation exercise revealed SAREB to be experiencing an equity shortfall, the subordinated debt was converted into equity in keeping with its original deeds of issue. As SAREB’s 2015 Annual Report describes, “The deed of issue of this debt states that it is contingently convertible in the event of an equity deficit: (i) when accumulated losses are greater than or equal to the sum of the Company's share capital and its reserves or (ii) when the Company is in a situation of mandatory dissolution because accumulated losses have reduced the Company's equity to less than one half of the share capital” (SAREB 2015).

In spite of the conversion of subordinated debt to equity, or perhaps because of the losses that precipitated it, some observers began to worry that the Spanish government, as guarantor of SAREB’s senior debt, might ultimately be responsible for the mounting losses that accrued to SAREB in its first seven years of existence. Spain had guaranteed €50.8 billion worth of senior debt issued by SAREB, totaling almost 5% of Spanish GDP at the time (Cas and Peresa 2016). If SAREB defaulted on its debt repayments, the burden would revert to the Spanish government.

Despite the efforts by the Spanish government to keep SAREB’s liabilities out of public debt calculations, Eurostat decided in February 2021 that SAREB should be reclassified within the general government sector (Eurostat 2021). This would shift the liabilities of SAREB into Spain’s total public debt, increasing the debt-to-GDP ratio from 117% to 120% (Reuters 2021). Eurostat determined that the consistent annual losses that SAREB posted and the government guarantee of the entire senior debt of SAREB constituted the behavior and characteristics of a public entity (Eurostat 2021).

In December 2012, SAREB’s first month of operation, it had only four employees. Over its first full year, its workforce swelled such that by the end of 2013, SAREB had 207 employees (SAREB 2013). In its second full year, SAREB hired more than 100 new employees and by the end of 2014, it employed 314 employees (SAREB 2014b). As of the end of 2019, SAREB reported that it employed 394 employees (SAREB 2019). By SAREB’s own admission, this remains an insufficiently small staff. “As we did not have enough employees to manage the size of our asset portfolio on their own, we assigned the management and administration of our properties to four external servicers (Altamira Asset Management, Haya Real Estate, Servihabitat, and Solvia), who also operate across Spain” (SAREB 2021).

As laid out in the 2014 Annual Report, “SAREB's governance bodies are the General Meeting, composed of the shareholders of the Company, and the Board of Directors, which […] comprised 15 members” (SAREB 2014b). Five of these 15 members are independent, a further eight are described as “proprietary directors” who represent the main shareholders of the company, and the remaining two are the Chairman and the CEO.

The Bank of Spain oversees SAREB’s compliance with its objectives and obligations as an AMC as well as regulations pertaining to governance and transparency. In addition, SAREB is also supervised by the National Securities Markets Commission (CNMV), in matters relating to business activity as “an issuer of fixed-income securities” (SAREB 2013). SAREB submits publicly available half-year and annual reports to its Monitoring Committee, which, “in accordance with Act 9/2012 […] was set up for the purposes of overseeing compliance with SAREB’s general objectives” (SAREB 2013). The Monitoring Committee is chaired by the Ministry of Economy, Industry and Competition and includes the Bank of Spain, the Ministry of Taxes and Public Authorities, and CNMV. An ECB representative also attends meetings as an observer.

FROB is a major stakeholder in SAREB, owning nearly half of its original common equity and frequently coordinating with it in bank recapitalization and restructuring efforts. FROB, in turn, is governed and administered by an 11-member Governing Committee, which includes FROB’s Chairman, four representatives from the Bank of Spain including the Deputy Governor, three representatives from the Ministry of Economy and Business, the Vice Chairman of the CNMV, and two representatives from the Ministry of Finance. FROB valued its majority stake in SAREB at zero in 2019, after recognizing SAREB’s losses gradually for years (Eurostat 2021).

SAREB ultimately acquired approximately 200,000 assets valued by SAREB at €50.8 billion (SAREB 2021). This €50.8 billion was discounted substantially from a gross book value of €106.9 billion (SAREB 2013). About 80% of these assets were real estate developer loans and the remaining 20% were real estate assets (SAREB 2021).^FNThese assets comprised both commercial and residential real estate, but primarily residential. The loans contained more than 300,000 in collateral assets, of which the size was not known by SAREB until 2014 (SAREB 2015).

The sooner an asset management company became active, SAREB’s proponents argued, the faster markets would calm. As assets are isolated and removed from banks’ balance sheets to SAREB, the theory goes, market participants should grow less concerned about the underlying solvency of financial institutions. There was in 2012, therefore, quite a bit of urgency to make SAREB operational (Louven 2017).

Under the terms of the MoU with the European Commission, SAREB agreed to issue new government-guaranteed debt to participating banks as payment for the bad assets it would acquire. With such urgency, some have suggested that buying assets with newly issued government guaranteed debt seemed the optimal strategy. SAREB did not need to wait around either for reluctant private investors to be convinced to invest in SAREB’s senior debt, or for policymakers to approve potentially politically unpopular and bureaucracy-laden fiscal expenditures. This approach also allowed SAREB to replace bad assets on bank balance sheets with very good assets—namely SAREB’s government-guaranteed senior debt, thereby strengthening bank balance sheets. While the debt posed a potential threat to the government in the event of a default, if all went according to plan, the profits from the disposition of assets could be used in part to pay back the debt that had initially been used to acquire the assets in the first place (Louven 2017).

The government securities that SAREB issued to fund its purchase of portfolios were indexed to floating interest rates. To hedge against higher interest rates as the global economy recovered from the Global Financial Crisis, SAREB conducted interest rate swaps in August 2013 that covered an initial notional amount of about €42 billion. However, interest rates steadily declined to historic lows in the aftermath of the interest rate swaps, which were only partially covered. For the period from 2019–2023, the fixed interest rate on the SAREB bonds falls in the range of 2.48% to 3.15%, which produces significant losses to SAREB. In both 2018 and 2019, SAREB paid over €500 million in interest expenses related to this swap contract, over half of the losses in that period (SAREB 2019).

In late May 2012, the consulting firm Oliver Wyman was contracted by the Bank of Spain (the Spanish central bank) to perform an evaluation of the Spanish banking sector. This evaluation, published on June 21, 2012, was titled “Bank of Spain Stress Testing Exercise” and is sometimes referred to as “the Oliver Wyman stress tests” (Oliver Wyman 2012a). Following the release of this report, Oliver Wyman was “commissioned to perform a bottom-up stress test analysis of the fourteen most significant financial groups in Spain” (Oliver Wyman 2012b). This second report, published on September 28, 2012, is sometimes referred to as the “bottom-up Oliver Wyman exercise.” As part of this second evaluation, Oliver Wyman projected that in an adverse scenario (which the firm defined as a GDP decline of 6.5% and in which they anticipated capital ratio requirements would be reduced to 6%), seven of the 14 banks they looked at would exhaust their loss absorption capacity.^FNFour of these, BFA-Bankia, Catalunya Banc, NCG Banco and Banco de Valencia were already majority-owned by FROB and would sell assets to SAREB in Group 1 (European Commission 2012). The additional three banking groups that failed the test were Banco Popular, BMN, and a group comprised of the planned merger of Ibercaja, Liberbank and Caja 3. They would be required to submit recapitalization plans and, depending on the result, either go into Group 2 (participating in SAREB) or Group 3. Seven banks, meanwhile, would maintain adequate capital ratios even in an adverse scenario. These seven were Santander, BBVA, CaixaBank, Kutxabank, Banco Sabadell, Bankinter, and Unicaja-CEISS, the proposed merger of Unicaja and Banco CEISS (Oliver Wyman 2012b).

In the Bank of Spain report on the Oliver Wyman stress tests, published on September 28, 2012, the banks were sorted into four groups. Group 1 banks were the four that were already majority owned by FROB because they had previously failed stress tests and required restructuring. Group 0 banks were those that had passed the Oliver Wyman Stress Tests and had been found to have no capital shortfalls. These seven represented “62% in terms of the analyzed portion of the sector’s credit portfolio” (Ministerio de Economia y Competitividad 2012). Banks that had failed the Oliver Wyman stress tests were required to submit recapitalization plans. The constituency of Groups 2 and 3 was to be determined at a later date after the as yet un-submitted recapitalization plans had been scrutinized (European Commission 2012). Group 3 would be made up of those banks for which FROB deemed their recapitalization plans to be effective, while Group 2 was reserved for banks that had failed the Oliver Wyman stress tests and had subsequently submitted ineffective recapitalization plans. Banks in Group 1 and Group 2 would be compelled to transfer assets to SAREB, while SAREB would be inaccessible to Banks in Groups 0 and 3 (SAREB 2013).

Ultimately, nine banks sold assets to SAREB—five from Group 1, and four from Group 2 (se Appendix C). Four of the five banks in Group 1 had failed the Oliver Wyman stress tests, and all four of the banks in Group 2 failed the tests as well (Oliver Wyman tested Liberbank and Caja 3 as a group, which explains the discrepancy between the number of banks that failed the stress tests and the number of banks that sold assets to SAREB).

In addition to limiting the eligibility of institutions that could transfer their assets to SAREB, SAREB acquired only foreclosed real estate assets with an individual minimum asset size of at least €100,000 and loans to real estate developers with a minimum borrower exposure of €250,000. SAREB also took direct ownership stakes in a select number of distressed real estate companies (FROB 2012).

There were no individual participation limits on assets that Spanish credit institutions transferred to SAREB.

SAREB planned to acquire nonperforming assets in two phases. The Group 1 banks would transfer their assets to SAREB in the initial phase, while applicable assets from Group 2 and 3 banks would follow thereafter (FROB 2012). Under Law 9/2012, institutions in Groups 1 and 2 were obliged to transfer eligible assets to SAREB (SAREB 2013).

In the first phase on December 31, 2012, SAREB acquired 145,125 assets valued at €36.7 billion from Banco de Valencia, Banco Gallego, BFA-Bankia, Catalunya Banc, and NCG Banco, the five institutions that had failed stress tests and were subsequently nationalized under FROB (Ortiz Risueno 2015) (see Appendix C).

Then, on February 28, 2013, a further 52,349 assets valued at €14.1 billion were transferred to SAREB from Banco CEISS, BMN, Caja3, and Liberbank, institutions that had failed subsequent stress tests and, as a result, had received support in the form of capital injections from the State through FROB (Ortiz Risueno 2015) (see Appendix C).

In general, if the transfer price at which AMCs acquire assets exceeds market price at the time of transfer, the operation implies the use of State aid. However, as Cas and Peresa (2016) explain, the operation, “can be declared compatible if the transfer price of the assets is not higher than the real economic value [REV] (or underlying long-term economic value) of the assets. […] The difference between the transfer price and the market price of the assets represents State aid.”

In Spain’s case, the transfer value, or price at which SAREB would buy assets from banks, was to be based on two components. SAREB used the results of Oliver Wyman’s bank stress tests to inform their REV determination. Second, after the REV was arrived at, an additional discount (or haircut, as the government sometimes referred to it) was applied to defray management and administrative costs as well as allow SAREB room to make a profit when divesting (SAREB 2013). SAREB did not have any input into the valuation of the assets and paid the price they were told to pay by Oliver Wyman and the Bank of Spain.

The most extensive explanation of the subsequent discount, and for that matter, of the government’s valuation approach in general occurs in the SAREB blueprint published by FROB on November 16, 2012. In it, the government writes, “the starting point for determining the price for transferring loans and real estate under ownership to SAREB is thus the base scenario from the Oliver Wyman Stress Test completed at the end of September 2012.” However, the government noted that its own valuation results might vary meaningfully from Oliver Wyman’s because of “major conceptual differences” between its own processes and those of Oliver Wyman (FROB 2012).

To rationalize the additional discount, the blueprint listed a number of SAREB-specific considerations, including “the operating costs associated with owning both loans and real estate assets, the costs of funding the portfolio while it is being held for sale, the fact that the sale to SAREB by each participating bank will be a major single portfolio sale, the overheads of SAREB, the costs of enforcement, the recovery costs of impaired loans.” The government argued that “these factors alone justify a significant haircut in respect of the estimated economic value of the assets” (FROB 2012). The government refrained from explaining how it planned to quantify these considerations.

SAREB’s valuation process was carefully supervised by European Commission officials. As Cas and Peresa (2016) explain, “the Commission closely monitored the methodology for measuring the value of the impaired assets transferred to Sareb at end-2012 and 2013 under the EU financial assistance programme. The Commission, assisted by external experts, found the asset transfer in line with State aid rules.”

SAREB itself did not perform the valuation of portfolios, did not see the results, and had to purchase the portfolios at the valuation provided to them.

The average haircut came out to about 53% on the book value (Bank of Spain 2017; Cas and Peresa 2016).

Initially, the Spanish government relied on the very banks that they had acquired assets from to help dispose of those assets, reasoning that the banks themselves had the best grasp on the nature of the assets they had once held, as well as an established sales force and the infrastructure to support real estate sales and financing. However, at the same time that the banks were being tasked with aiding the government in unloading SAREB’s distressed assets, they were also attempting to unload those distressed assets that remained on their own balance sheets (SAREB 2014b).

By December 2014, in the face of persistent losses, the government concluded that this conflict of interest was presenting enough of a hurdle to require a change of strategy. SAREB awarded contracts to four loan servicers: Altamira, Haya Real Estate, Servihabitat, and Solvia. SAREB hoped these companies would streamline efficiency and increase profitability (SAREB 2014b). SAREB did not split individual portfolios to account for specific servicer skillsets and experience. Instead, SAREB moved entire portfolios from the banks to the servicers, with the exception of one portfolio that SAREB divided into loans and real estate assets. At first, sales slowed as the servicers spent time figuring out what exactly they were now responsible for selling, and SAREB executives focused on the tens of thousands of distinct property assets and millions of pieces of data that needed to be transferred to the servicers (SAREB 2015).

A new sales strategy was also implemented with the arrival of the new servicers. Under the old approach, assets had been packaged and sold in large portfolios in an attempt to shed assets quickly and service SAREB’s debt burden. In remarks to SAREB shareholders in 2014, SAREB’s then-president Belén Romana reiterated that SAREB’s primary goal was to pay off the debt that it issued to purchase its assets. She stated, “the Company’s main commitment is the amortisation of debt, and we are all working towards meeting this objective.” (SAREB 2014a). While the old strategy was narrowly successful at raising revenue, the bulk sale approach also helped contribute to net losses of €261 million in 2013 and €585 million in 2014 (see Figure 1).

Under the new strategy, sales were smaller and more open to customer preference. SAREB and the servicers hoped that the personal touch would lead to higher individual sales prices even as it would cut into overall revenue in the short run (SAREB 2014b).

Cas and Peresa (2016) write of this transition in sales approach, “SAREB [switched] from a ‘warehouse’ to a ‘factory’ business model. Thus, SAREB transitioned from being an asset liquidator focused on selling at the best prices and with more dependence on the economic cycle, to an asset manager focusing more on creating value added, so that the return from the transaction increases when sold.”

In recent years, SAREB has embarked on a new business strategy that focuses on converting its loan portfolio into real estate assets. To achieve this, SAREB utilizes dation in payments and foreclosures on nonperforming loans to acquire the property used as collateral in the loans. These real estate assets are more liquid than loans, which face significant discounts on the financial markets. In its 2019 annual report, SAREB estimated that it would add almost 100,000 properties worth about €8.8 billion to its portfolio from 2020 to 2022. In 2019, SAREB received the majority of its income from real estate assets for the first time. In the pursuit of this balance sheet transformation, SAREB has reduced its financial asset portfolio by 51% since its creation (SAREB 2019).

There was no formal asset purchase window, with acquisition and transfer of assets occurring over the two distinct phases described previously. SAREB was designed to dispose of its assets over a 15-year period before expiring (FROB 2012).

On March 10, 2020, Royal Decree-Law 6/2020 permitted SAREB to continue operations despite the exhaustion of its equity, allowing it to carry on with the disposal of its portfolio (BOE 2020). SAREB is still an ongoing program in 2021.