Who Will Be the Bag Holders?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“There will be no Bad Bank in Spain, and we will establish procedures that will not be burdensome for taxpayers.” Those were the infamous words of Spanish PM Mariano Rajoy during the first few months of 2012. Months later Spain’s bad bank, Sareb, was born, and Spanish taxpayers were left holding the tab for the biggest bank bailout in Spanish history.
When Sareb was created, its creators assured Spain’s taxpayers that their money would be returned; some even claimed that the State would make a tidy profit from the operation. Since then, the losses have kept piling up. It is estimated that over €2.1 billion of public funds have been poured into the bank so far and a further €2 billion was provisioned for this year’s accounts alone.
Slowly but surely, the tune is changing. According to Jaime Ponce, the president of Spain’s Fund for Orderly Bank Restructuring (FROB), which has already splashed tens of billions of euros of public funds on bank rescues, taxpayers probably won’t get their money back until 2027, at the earliest. And even then, the plan to recoup public funds is based on hypotheses that are not “infallible.” They depend on the future cost of financing and the evolution of Spain’s real estate market, which in turn depends upon the buying power of Spain’s lost generation (its current unemployment rate: 47%).
In other words, Spanish taxpayers, don’t hold your breath.
A New Dawn?
While Spain’s bad bankers play for time, Banco Popular, Spain’s fourth biggest bank, is planning to spin off its own bad bank early next year, with around €6 billion euros in toxic assets. The listing is a last-ditch attempt to clean up its books by reducing its exposure to property assets.
Given that Banco Popular is, pound for pound, the largest owner of toxic assets in Spain as well as the country’s worst performing bank (according to the ECB’s latest stress test), it’s a big ask. In the last five years, Popular has had three capital expansions, with the last one taking place just last summer. To put that into context, Italy’s biggest problem bank, Monte dei Paschi, has so far had only two, though it would love to have a third. Popular’s share price, like MPS’s, has lost almost all its value, slumping from €15 in 2007 to €1.11 today.
The imaginative name Banco Popular has given to its real estate spinoff is “Sunrise” (in English, not Spanish), presumably with the intention of evoking nice positive feelings as well as the idea of a new dawn (as opposed to a false one).
The plan, which has been under deliberation for over a year and is still not ready for full public unveiling, raises far more questions than it answers. Foremost among them is just how toxic its toxic assets will be. Popular clearly hasn’t had much luck offloading its real estate assets over the last eight years. While it’s true that Spain’s real estate market has experienced some semblance of recovery in recent years, most of the demand is for prime assets.
And “prime” is a word that’s not likely to be associated with Sunrise’s assets, many of which will be in rundown barrios (city neighborhoods) or in the ghost towns that blight Spain’s suburban landscape.
Blanket of Opacity
Next question: what will be the real value of all these toxic real estate assets?
Once they are transferred to the newly floated real estate unit, their value is expected to drop from around €6 billion, their current value on Popular’s books, to between €3-4 billion. But as El Economista points out, “how can you possibly gauge the value of something when you don’t even know what it is?”
Even hazarding a guess at the potential value of Sunrise’s real estate portfolio is an impossible task, given that virtually nobody (apart from a select few at Popular) has a clear idea of what it actually contains. The blanket of opacity is unlikely to be lifted prior to the new firm’s launch. As the financial daily, Expansión, reports, Sunrise will not have to present any accounts for its last three years of operations, as is required for the lion’s share of IPOs in Spain, on the grounds that it has no accounts.
It’s a convenient get out clause. Two other IPOs that enjoyed this rare exception were the frankenbanks Banca Cívica and Bankia, both of which were launched on the basis of dubious accounts and ended up collapsing within months of their IPOs. It’s hardly what you’d call an auspicious omen.
Who Will Be the Bag Holders?
As things currently stand, the new firm’s capital — whose total amount is yet to be determined — will be provided initially by Popular — this is a spin-off, not an IPO — and will be divvied up among its shareholders. The lion’s share of Sunrise’s liabilities will consist of debt, the volume and price of which is also yet to be determined. That debt, we are told, will be sold to institutional investors, presumably with favors owed.
As for the subordinated debt issued by Sunrise, it will be acquired by Popular, yet apparently (and this is where things get truly interesting…) in small enough measures to ensure that the new, entirely separate, wholly independent entity (that is really little more than a sly balance sheet operation) is not in any way dependent upon Popular. Welcome to the rabbit hole.
Like Bankia’s IPO, Popular’s creation of Sunrise appears to have the undivided support of Spain’s government, market regulators and the Bank of Spain. No surprise there: all three gave their whole-hearted blessing to Bankia’s failed IPO in 2011, which courts in Spain now consider a full-blown criminal operation. Taxpayers have already had to cough up over €2 billion to compensate duped investors.
For the moment Popular’s future hangs in the balance. On Friday it reports its third quarter earnings, which could put even further pressure on its share price. Hedge funds, smelling blood, have piled on the shorts which now represent 7% of the firm’s total shares.
If Popular survives the coming months, its medium-term survival will depend on its ability to magic away up to €15 billion of toxic debt from its balance sheets. It’s a reminder that in today’s debt-saturated world, it is reverse alchemy — the ability to create nothing out of something (without blowing yourself or the system up in the process) — that is the real holy grail. By Don Quijones, Raging Bull-Shit.
The art of Making Bad Debt Disappear? Read… Italy’s Banking Crisis Gets Addressed: How to Conceal a Problem that Threatens to Engulf the Entire Eurozone