Swedish AMCs: Securum and Retriva

In response to the financial difficulties facing two systemically important Swedish banks, the government initially adopted an ad hoc approach: a capital injection for Nordbanken and preferential lending with a guarantee for Första Sparbanken. The government, as Nordbanken’s majority shareholder, subscribed to SEK 4.2 billion of Nordbanken’s SEK 5.2 billion new equity issue. Financial difficulties continued to surface in Swedish banks as Gota Bank would fail to meet its capital requirements. The government assumed the liabilities of Gota Bank, but the holding company was declared bankrupt. The government nationalized the bank and provided a loan guarantee of SEK 10 billion (Drees and Pazarbasioglu 1995).

In the fall of 1992, the Ministry of Finance outlined a plan to address the currency and banking crises (Cerruti and Neyens 2016). A key component of this was a blanket guarantee of bank deposits and liabilities. Through the blanket guarantee, the government committed to ensuring that the banks would be able to meet credit commitments in a timely manner (Jonung, Kiander, and Vartia 2009). The act also created the Bank Support Authority (Bankstödsnämnden), which could provide assistance to banks and financial institutions using four methods:

1. Issuing guarantees to cover future credit losses and lost returns on assets,
2. Granting loans or loan guarantees,
3. Providing guarantees on the issuance of new shares, and
4. Granting other types of capital contributions (Jonung, Kiander, and Vartia 2009; Securum AB 1997).

In practice, the government’s crisis support varied across banks. Handelsbanken and SEB, the largest private commercial banks, were recapitalized by shareholders and established internal bad bank subsidiaries. Government support to these banks was limited to the benefit of the blanket guarantee. Similarly, Föreninsbanken, a cooperative bank, benefited only from the blanket guarantee. Första Sparbanken merged with 10 smaller banks to form the Savings Bank Sverige, which benefited from both the guarantee and interest rate subsidies from the government. For Gota Bank and Nordbanken, the government utilized multiple tools, including the transfer of bad assets to individual AMCs (Cerruti and Neyens 2016).

Nordbanken’s bad assets were separated from the good assets and placed in Securum, while the bad assets from Gota Bank were separated and placed into Retriva. Initially, Nordbanken established an internal “Intensive Care” unit—which later became Securum—without government support. However, in 1992, the government realized that Nordbanken would not be able to maintain an 8% CAR. It decided to recapitalize the bank and create a separate bad bank subsidiary owned by the government (Securum AB 1997).

The Swedish Parliament approved the restructuring of Nordbanken. In March and April of 1992, the government worked to draft and finalize a bill under which the government would purchase the remaining shares in Nordbanken. The plan also included a SEK 10 billion capital injection for Nordbanken and capital injections for Securum (Securum AB 1997). This plan was approved in June 1992 (Jonung, Kiander, and Vartia 2009). At the beginning of 1993, Securum officially separated from Nordbanken to become a fully government-owned company (Securum AB 1997).

As a part of the December 1992 parliamentary action, the government created the Bank Support Authority. The Bank Support Authority could provide support to banks through guarantees, share purchases, or other means, and the authority intervened in Gota Bank after the parent holding company filed for bankruptcy. Gota Bank’s bad assets were carved out and placed in an internal bad bank subsidiary, Gota Bank Special Commitments, which began operating in January 1993. The Bank Supervisory Authority then sold the problem loans to Retriva in December 1993 (Securum AB 1997).

Securum and Retriva operated under the Companies Act and did not receive special legal authority. It appears that the Swedish government determined that special powers were “unnecessary given the existence of adequate bankruptcy and foreclosure legislation” (Cerruti and Neyens 2016).

Even though it was deemed unnecessary to give Securum and Retriva extraordinary powers, they were exempted from the existing requirement that assets be liquidated in three years. Other Swedish banks during the crisis were also exempt from this collateral liquidation requirement, as policymakers were concerned about creating downward pressure on asset prices if banks and AMCs flooded the market with problem assets during a short timeframe (Ergungor 2007).

Securum and Retriva were established as finance companies, meaning that they did not have bank charters, which was considered “too restrictive” for the agencies to fulfill their objectives and mandates (Cerruti and Neyens 2016).

Securum and Retriva were established with the specific purposes of acquiring, managing, and disposing of bad loans and assets from Nordbanken and Gota Bank, respectively. These activities were intended to stabilize the financial and real estate markets and allow the good components of the banks to continue operations. Securum was also given an explicit mission to recover “as much as possible of the acquired commitments, in order to minimize the State’s and thereby also the taxpayers’ cost” (Securum AB 1997).

In 1990, Nordbanken created an internal bad bank subsidiary to allow the bank to focus on daily operating activities while the “Intensive Care” unit subsidiary could focus on credit management of poor quality loans. At the beginning of 1993, Securum was officially separated from Nordbanken and became a fully government-owned finance company (Securum AB 1997).

Because Gota Bank’s ongoing financial troubles led the government to take over the bank, Gota Bank’s bad loans were moved to a bad bank subsidiary, which was acquired by Retriva. In 1996, Securum acquired Retriva, thus merging the operations and portfolios of the two AMCs (Securum AB 1997).

Securum and Retriva were fully owned by the government, but “the state did not assume the role of an active owner,” which created a separation between the ownership and control of the AMCs (Cerruti and Neyens 2016). Securum had a managing director and a board composed of primarily real estate professionals, though a single Ministry of Finance official was on the board (Cerruti and Neyens 2016; Klingebiel 2000). The MoF appointed Securum’s board, and the board appointed the senior management (Klingebiel 2000). This organizational and management structure was designed to preclude politicians from placing political pressure on Securum’s operations (Cerruti and Neyens 2016).

The Swedish Bank Support Authority monitored Securum and Retriva’s operations. Securum also had a Market Committee of representatives from different businesses that monitored the soundness of Securum’s restructuring and management plans. Furthermore, Securum’s board established an Irregularity Committee to examine cases of fraud (Klingebiel 2000).

Securum established subsidiary companies and units to manage specific components of its operations. Securum Treasury was established to manage financial flows, loan procurement, and currency. Securum Finans was responsible for credit management and processing problem loans. Each case was analyzed and prepared by a project team, reviewed by a regional team, and approved by the central credit committee, which included representatives from Securum’s board. After taking over a loan’s collateral, Securum transferred the asset from Securum Finans to a different subsidiary company for management and disposal; these subsidiary companies were intended to manage the assets and improve divestment opportunities (Securum AB 1997).

Securum established four regional real estate management subsidiaries, a subsidiary to manage hotel and tourism-related assets, and a holding company for assets related to industry. Because some of Securum’s portfolio was located outside Sweden, it established offices in London to manage disposal of foreign assets. The subsidiary asset company board was required to approve asset acquisitions. For coordination of domestic real estate management and activities, Securum established a special real estate committee (Securum AB 1997).

Similar to Securum, Retriva established subsidiary companies: a finance company to manage the loans upon the acquisition from Gota Bank, a real estate company to manage properties in Sweden, and an asset management company. Unlike Securum, foreign holdings did not constitute as significant a portion of Retriva’s portfolio, so it did not establish a separate subsidiary to manage foreign properties (Securum AB 1997).

Securum’s management was appointed in the fall of 1992, and it began to work on staffing the organization for loan and asset management. Securum recruited employees from Nordbanken but worked to ensure that individuals would not be involved in the liquidation of loans that they were involved in originating (Securum AB 1997).

In creating the AMCs for Nordbanken and Gota Bank, it does not appear that the government established a size limit. When Securum was established, it took over problem loans and assets with a total face value of SEK 67 billion, and Retriva took over a total of SEK 42 billion at face value (Securum AB 1997).

Securum purchased SEK 50 billion in assets from Nordbanken. The Swedish government provided SEK 24 billion, and Nordbanken provided SEK 27 billion to fund the AMC. Funding from the government was in the form of equity while Nordbanken lent “advantageous credits” to Securum. The government guaranteed SEK 10 billion of the loan from Nordbanken (Securum AB 1997).

Gota Bank was taken over by the government and its bad loans were separated into an internal subsidiary. These loans were then purchased by Retriva, which was financed with SEK 3.8 billion in equity from the government and SEK 3.5 billion in government-guaranteed loans (Securum AB 1997). It is not clear from Securum’s final report how the remaining SEK 8.7 billion in Retriva’s portfolio was financed.

Because additional write-downs were expected on Securum’s portfolio and because sales were not expected to begin for several months, the government capitalized Securum with SEK 24 billion in equity to cover the additional write-downs (Securum AB 1997). Furthermore, the substantial capital from the government was designed to prevent Securum from going back to the Swedish government to request additional funding, thus providing Securum with additional political insulation, especially in the scenario that it needed to operate over the long term (Cerruti and Neyens 2016).

Unlike Nordbanken, Gota Bank had significantly written down the value of the loan portfolio prior to transfer to the AMC. Therefore, it was not expected that Retriva would have to record significant write-downs on the portfolio and its equity capital was smaller than that of Securum (Securum AB 1997).

Other Swedish banks and finance companies benefited from different types of governmental assistance, but Securum and Retriva were each established to acquire and manage problem loans from individual financial institutions (Cerruti and Neyens 2016). Participation was mandatory as both banks were government-owned at the time of the asset transfers. Nordbanken first created an internal bad bank subsidiary. The government then acquired the bad bank as part of its restructuring and assistance to the bank. After Gota Bank’s parent company declared bankruptcy, the Swedish government took over the bank and moved problem assets into an internal subsidiary unit; these assets were then transferred to Retriva (Securum AB 1997).

Securum’s asset transfer process was highly dependent on Nordbanken, as the bank was responsible for selecting the assets to be transferred. External consultants and an auditing firm assisted with the valuation of assets and collateral (Cerruti and Neyens 2016). The minimum asset size eligible for transfer to Securum was SEK 15 million (Securum AB 1997). However, assets could be transferred even if they were below the size threshold as long as they were related to the main loan that was transferred to Securum; this was intended to facilitate asset management and disposal. Securum’s portfolio consisted primarily of loans, which accounted for more than 90% of the portfolio while shares and real estate comprised the remainder of its portfolio at the time of transfer (Securum AB 1997). Overall, Securum acquired more than 3,000 loans to 1,274 companies, and approximately 80% of its portfolio was related to real estate (Cerruti and Neyens 2016; Securum AB 1997). Approximately 10% of Securum’s portfolio was related to real estate assets abroad (Securum AB 1997).

Retriva’s portfolio originated in Gota Bank, which transferred the assets to an internal bad bank subsidiary, Gota Bank Special Commitments, after Gota Bank’s holding company declared bankruptcy in 1992. The Bank Support Authority then acquired the portfolio and sold the assets to Retriva in 1993. The loan portfolio was limited to loans with a value of SEK 5 million or more. At the time of transfer to Retriva, the 3,700 loans were grouped into 1,200 commitments because of shared collateral or ownership. Retriva’s portfolio accounted for nearly half of Gota Bank’s total lending (Securum AB 1997).

Securum and Retriva acquired a cumulative SEK 102 billion in loans at face value, SEK 3 billion in properties, and SEK 7 billion in shares (most of which were in Nobel Industrier), for a total portfolio of assets of SEK 112 billion (Securum AB 1997).

Securum and Retriva were components of the broader restructuring of the Swedish banking system. The government had fully taken over Nordbanken, then its loans and the associated reserves were transferred to the government. In September 1992, Gota Bank, which had become insolvent, was acquired by Nordbanken (Englund 2015). Because Securum and Retriva were part of the government’s restructuring of two government-owned banks, the actual mechanics of the transfer are not clear. Cerruti and Neyens (2016) do not consider Securum and Retriva to have purchased assets and note that it did not purchase assets in exchange for any consideration.

Securum’s portfolio, which had a face value of SEK 67 billion, was acquired for SEK 50 billion as Nordbanken wrote down SEK 17 billion on the portfolio prior to the transfer. According to Securum’s final report, it was expected that additional write-downs would be necessary, and these write-downs were to be covered by government’s SEK 24 billion capitalization of Securum (Securum AB 1997).

Compared to the assets Nordbanken transferred to Securum, the assets transferred from Gota Bank to Retriva had already been more substantially written down by Gota Bank. The total portfolio of SEK 45 billion in initial book value had been written down to SEK 16 billion prior to transfer. The government did not expect that future write-downs would be required on the portfolio, leading it to capitalize Retriva with just SEK 3.8 billion (Securum AB 1997).

Securum and Retriva’s combined portfolio at face value before write-downs totaled SEK 102 billion in loans at face value, SEK 3 billion in properties, and SEK 7 billion in shares (Securum AB 1997).

Securum’s first priority during its first six months of operations was to determine if it should manage a loan as a credit commitment or if it should foreclose upon the underlying collateral. The decision to foreclose on property collateral also involved the debtors filing for bankruptcy. Securum prioritized this determination at the beginning of its operations to prevent further deterioration in its portfolio value. Beyond taking over the underlying collateral, Securum could implement a repayment plan for the borrower, sometimes with concessions, or determine a reconstruction plan for the borrower (Securum AB 1997). Bankruptcy was the solution for 70% of Securum’s clients, and Securum took over the collateral securities as this was often the only “economically viable option” (Englund 2015; Securum AB 1997).

After converting loans into other types of assets, Securum transferred the assets from Securum Finans, the subsidiary unit responsible for credit management, to one of its subsidiary asset management companies. Internally, Securum recorded the transfer of assets at the estimated market value, and the difference between the loan value and the market value of the collateral was recorded as a loss under Securum Finans (Securum AB 1997).

Securum held between 1% and 2% of the total commercial real estate in Sweden after liquidating most of its loan portfolio (Englund 2015). In order to manage its large real estate portfolio, Securum transferred domestic real estate assets to one of its four regional real estate companies. Other subsidiary asset management companies included a company for the hotel and tourism industry, a holding company for industrial companies, and a foreign branch in the UK and other countries to manage the foreign real estate holdings (Securum AB 1997).

These asset management companies sought to restructure and improve divestment opportunities for the assets. Through “structural deals,” Securum worked to package the assets into companies that were “better, larger, and stronger” and sell shares in these companies. For example, one regional real estate company, which rented and managed its portfolio of real estate properties, was listed on the Stockholm Stock Exchange in 1994 (Securum AB 1997). Overall, Securum used the method of selling whole property companies through IPOs in four transactions in Sweden and one transaction in London. This method was “attractive” as it avoided further negative pressure on prices and provided “substantial returns to Securum,” but it accounted for less than half of the assets disposed of by Securum (Cerruti and Neyens 2016).

Beyond IPOs of property holding companies, Securum sold individual properties and packages of properties (Cerruti and Neyens 2016; Englund 2015). Securum did not sell properties by auctions, as its preferred method of sale involved direct negotiations with potential buyers (Cerruti and Neyens 2016).

Retriva was organized similarly to Securum prior to the merger, as it also had subsidiary companies for specific and disposal purposes. However, because it had a smaller portion of foreign assets, it did not establish a separate subsidiary to manage foreign loans (Securum AB 1997).

From the onset, it appears that Securum’s management was concerned about the mismatch between employee incentives and organizational incentives related to disposal and recovery (Securum AB 1997). In general, an AMC’s goal to maximize loan recovery and wind down as quickly as possible does not align with an employee’s long-term career goals or concerns about permanent job stability. Because of this, Securum’s management introduced the idea of an incentive program where bonuses were related to performance (Englund 2015).

In practice, the employee incentive scheme was controversial and politically charged (Englund 2015). Although Securum’s board first discussed an incentive program in November 1992, it did not commit to an incentive structure until the spring of 1994 (Bergström, Englund, and Thorell 2003). The program was limited to Securum Finans, which had already liquidated a large portion of the loan portfolio (Bergström, Englund, and Thorell 2003). Beyond a bonus structure, Securum also adopted “generous severance packages to attract high quality people” (Klingebiel 2000).

When Securum began operating as a separate government-owned AMC, it was expected to operate over the course of up to 15 years (Securum AB 1997). In 1995, Securum’s management proposed that the AMC be wound down by the middle of 1997, and Parliament formally dissolved Securum in June 1997 (Cerruti and Neyens 2016). In Securum’s final report, its management attributed the “dramatic decrease in interest levels and a generally improved business climate in Sweden and abroad” as the primary reason for Securum’s earlier end date (Securum AB 1997).