Spain’s FROB to Use EU Funds to Invest in Bad-Bank Capital

Spain will use European bailout funds to pay for the holding it plans to take in the bad bank for problem loans as it continues talking to investors it hopes will buy a majority stake in the vehicle, Economy Ministry officials said.

The state bank-rescue fund, or FROB, plans to acquire 45 percent of the bad bank, leaving 55 percent for private investors. The vehicle’s capital will amount to about 5 billion euros ($6.4 billion), 20 percent of which is equity and the rest subordinated debt yielding 8 percent, said the officials, who briefed reporters on condition of anonymity.

The government wants foreign investors to own about 10 percent in the bank to lend credibility to the project. Even as investors have shown more interest in buying assets from the bad bank than buying shares in it, their interest in those assets makes becoming a shareholder in the vehicle more attractive, said one of the officials. While that could pose a conflict of interests, any such conflict could be managed, and would be offset by the fact Spanish banks and insurers are also expected to become shareholders, he said.

Spain is creating the bad bank as part of the 100 billion- euro European bank bailout it agreed to in June as it tries to cleanse troubled lenders of real-estate assets following the collapse of a decade-long housing boom. The government wants private investors to own most of the vehicle, which is due to be set up by Dec. 1, in order to reduce the cost to taxpayers already shouldering a surge in public debt.

Real-Estate Assets

The bad bank will buy the real-estate assets using senior state-backed bonds that are eligible as collateral in the European Central Bank’s financing operations. They will have maturities of one to three years and similar yields to equivalent Treasury notes, the officials said.

Once under the bad bank’s control, some real-estate construction might be demolished if managers decide it makes commercial sense, one of the officials said. Any unfinished developments it decides to complete must be finished within the first four years, and managers estimate that after the third year some of the land they will own could be developed, he said.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Andrew Davis at abdavis@bloomberg.net

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