Spanish Banks Selling Debt Servicers as Funds Circle

Photographer: Angel Navarrete/Bloomberg

New residential apartment blocks are reflected in a puddle on a street in Sesena, near Madrid. Buyers of Spanish real estate are finding it harder to repay loans as the country’s unemployment rate hits 26 percent, driving bad loans as a proportion of total lending in the banking system to 10.4 percent. Close

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Photographer: Angel Navarrete/Bloomberg

New residential apartment blocks are reflected in a puddle on a street in Sesena, near Madrid. Buyers of Spanish real estate are finding it harder to repay loans as the country’s unemployment rate hits 26 percent, driving bad loans as a proportion of total lending in the banking system to 10.4 percent.

Spanish banks including Bankia (BKIA) group and Catalunya Banc, the largest nationalized lenders, are seeking buyers for their debt-servicing units as distressed investors circle more than 50 billion euros ($65 billion) of assets held by the government-led bad bank.

Bankia hired KPMG LLP to manage the sale of its Habitat unit, according to two people with direct knowledge of the deal who asked not to be identified because the plans are private. Barcelona-based Catalunya Banc tapped Spanish investment bank N+1 to approach potential investors for its mortgage-servicing arm, the people said.

Selling servicers would help beleaguered Spanish lenders, pave the way for more funds to capitalize on distressed debt and make it easier for the government’s bad bank to dispose of soured real estate assets it took over from lenders that needed state aid. Centerbridge Partners LP, Apollo Global Management LLC (APO) and other investors are already building firms in Europe that ensure payments on debt such as mortgages are kept up to date and try to maximize recoveries on bad debts.

“Distressed asset funds are the natural buyers of servicers on sale because if they try to buy pools of non- performing loans, they would like to be sure that all is being done to maximize recoveries,” said Manuel Anguita, a Madrid- based partner at Aguila Capital, which brokers distressed-asset transactions.

Capital Shortages

Spain created its bad bank to help lenders facing capital shortages sell their soured real estate assets as part of the commitments agreed to last year for a bailout of as much as 100 billion euros from the European Union. The institution, known as Sareb, plans to sell its first 1.5 billion euros of assets this year, out of a total of 50.4 billion euros of assets turned over to it by state-aided lenders, Economy Minister Luis de Guindos said March 12.

NCG Banco SA, another nationalized bank, also is considering a sale of a unit that includes managing bad loan recoveries and assets transferred to the bad bank, said a person familiar with the situation who asked not to be identified because the information isn’t public. A spokeswoman for the bank didn’t immediately comment when contacted by telephone.

Nationalized banks are being forced to reduce assets and scale back businesses as part of conditions demanded by the European Commission to allow them to receive taxpayer funds.

A spokesman for Bankia, who asked not to be named in line with its policy, declined to comment. Spokespeople for Catalunya Banc, KPMG and N+1, also declined to comment.

Recovering Value

For investors in distressed assets, a servicing business is key to recovering value, said Manel Guillen, chief executive officer of Mediterranean Capital Management, a Barcelona-based distressed mortgage fund, which manages 500 million euros of assets for undisclosed U.S. investors

“The servicing is a key part of our strategy and for that reason we do the whole process in house,” Guillen said. “When we acquire a portfolio of distressed commercial or residential home loans we should have a clear way out over the next 24 months, so we need servicing expertise for that.”

Centerbridge, set up in 2005 byJeffrey Aronson and Mark Gallogly, bought loan servicer Aktua late last year from Banco Santander SA (SAN)’s Banco Espanol de Credito SA unit.

Aktua has more than 30 offices throughout Spain with 200 employees, according to its website. Santander itself sold Reintegra Comercial Espana, its debt-recovery business, to Norway’s Lindorff Group AB in March 2012 for an undisclosed amount.

Apollo Investment

Lapithus Group, a servicing unit of Apollo, has 25 people in Madrid managing more than 180,000 home, corporate and consumer loans, according to its website. Apollo is planning to invest 1 billion euros to buy assets from lenders and the country’s bad bank, Chief Executive Officer Leon Black told Expansion newspaper in November.

Wilbur Ross, the billionaire who has taken stakes in U.S., U.K. and Irish lenders and servicers, said in October he’s interested in Spanish banking assets.

Seven Spanish lenders, including Bankia and Catalunya Banc, have so far taken about 40 billion euros of aid under the terms of the European bailout sought by the government for the financial system last year. Prime Minister Mariano Rajoy sought European aid after mounting losses at lenders including Bankia undermined confidence in the finances of the government.

Sale Focus

“Spanish banks are currently undergoing a process of deleveraging and recapitalization, so you would expect they are focusing on the sale of non-core assets,” said Vanesa Carceller, Spain director for Bluestone Group, an Australian financial services specialist. “The mortgage servicing business falls under that category, and there seems to be a reasonable appetite from investors for those platforms.”

Investors are looking for other ways to profit from the property crash. La Caixa banking group, which owns the country’s third-biggest bank, plans to offer investors a stake in the property management division it created as part of last month’s reorganization of its real estate arm, ServiHabitat, said people familiar with the plans, who asked not to be named because the information hasn’t been made public.

Like its competitors, La Caixa has been forced to manage properties it repossessed by renting or selling them. Revenue from those operations doubled last year to 1.6 billion euros, according to the lender.

A spokeswoman for Barcelona-based La Caixa, who asked not to be named in line with company policy, declined to comment.

Unemployment Rate

The country has about 167 billion euros of doubtful loans, according to Bank of Spain data. Buyers of Spanish real estate are finding it harder to repay debt as the country’s unemployment rate hits 26 percent, driving bad loans as a proportion of total lending in the banking system to 10.4 percent.

The government has proposed a battery of measures including a freeze on evictions intended to reduce the burden of defaults and foreclosures amid protests and suicides linked to home seizures. That’s in response to concerns that the situation could deteriorate further as an economic slump in its sixth year grinds on.

The European Union’s highest court today struck down parts of Spanish mortgage law, saying the rules are unfair on consumers and must be changed. Borrowers who claim the terms of their mortgage are unfair need to be provided with greater protection by the law, the Luxembourg-based European Court of Justice said in a statement.

Most Vulnerable

Rajoy told Spain’s Congress yesterday that the government was seeking to protect homeowners most vulnerable to the impact of the country’s economic crisis. “We have to reconcile this desire, which is everyone’s, with the defense of legal security and the rule of law,” he said.

For potential investors in servicers and in the loans themselves, government efforts to stem foreclosures and help homeowners, adds to the uncertainty of the investment.

“There’s massive regulatory uncertainty in Spain as to what you will be able to do with those distressed assets and the borrowers associated with them,” said Angel Mas, president of European mortgage insurance at Genworth Financial Inc. (GNW) “We’ve seen the pressure the government suffers to keep people in their homes and to kick the can forward.”

Shrinking Economy

The economy, in its second recession since 2009, will contract a further 1.5 percent this year, according to the average estimate in a Bloomberg survey of 40 analysts.

About 400,000 homes in Spain have been foreclosed on since the start of the crisis, said Carlos Banos, president of AFES, a Madrid based association that advises homeowners on how to restructure mortgages and avoid repossession.

The value of those homes is about 65 percent below the value of the loans on the properties at origination, according to Fitch Ratings.

Even as investors position themselves to buy distressed Spanish assets, Sareb’s strategy remains unclear, said Mas.

“Buying a servicer makes sense in combination with taking a portfolio position,” Mas said. “Right now, everybody is looking to see what Sareb will do. Sareb can be a force that will catalyze the sale of portfolios or they can be a force that can prevent that from happening or delay it.”

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Charles Penty at cpenty@bloomberg.net; Sharon Smyth in Madrid at ssmyth2@bloomberg.net.

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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