Spain’s Bad Bank Begins 15-Year Suicide With Bull Sale

Spain’s Sareb, set up last year to acquire 90 billion euros ($116 billion) of soured real estate assets at a discount from rescued lenders, is preparing its first sale, known as ‘Project Bull,’ to test the beleaguered property market’s ability to attract investors.

Sareb has hired KPMG LLP to market a pool of homes located in the south and east of Spain, in Andalusia and Valencia, as well as unfinished buildings, according to four people with knowledge of the auction. Bids are due by July 18 on the real estate, which could be worth about 200 million euros, said the people, who asked not to be named because it’s private.

“Success on the first sale would be a signal to other investors that there’s an opportunity here, but this is a big hurdle,” said Lee Tyrrell-Hendry, a credit strategist at Royal Bank of Scotland Group Plc in London. “Investors are looking for yield and Spain is one of the few areas you can get it, but that is because there are still huge risks and the economic outlook is still weak.”

Private equity firms including Leon Black’s Apollo Global Management LLC, Thomas Barrack Jr.’s Colony Capital LLC and billionaire Wilbur Ross are among those circling, looking for ways to profit from Spain’s property crash, which sent home prices down 39 percent since the 2007 peak and drove unemployment to 27.2 percent. Foreign investment will be critical to Sareb, which must meet a target of 1.5 billion euros in sales this year to demonstrate its viability to investors.

Toxic Assets

Under Chairwoman Belen Romana, Sareb has pledged to sell about 45,000 properties, approximately half its stock, in the first five years, and has a maximum 15-year lifespan. Over that period it aims to generate an annual internal rate of return of 13- to 14 percent for its shareholders, before shutting down.

Spain created its bad bank last year to help lenders facing capital shortages sell their toxic real estate assets as part of the commitments agreed to for a bailout of 41 billion euros from the European Union. Investors including Deutsche Bank AG, Barclays Plc, Spanish lenders and insurance companies agreed to purchase 55 percent of the capital in Sareb, allowing the government to keep the facility’s debts off its books.

The unit bought almost 200,000 assets, mostly plots of land and housing, for about 50 billion euros, with average discounts ranging from about 46 percent on loans to as much as 80 percent on land purchases, from eight Spanish banks starting in December.

Sareb’s first sale contains about 38 completed developments, many in Andalusia and Valencia, and at least one unfinished project, according to the people with knowledge of the offering.

‘Real Push’

“They probably will find buyers because right now there’s a real push out there to find assets on the part of investors, but there’s risk that goes into this obviously,” said Scott MacDonald, head of research at Stamford, Connecticut-based investment firm MC Asset Management Holdings LLC and co-author of “When Small Countries Crash.” Central banks have pumped in a massive amount of money, he said, pushing investors to look for yields and fueling demand for riskier trades.

The extra yield investors demand to hold junk bonds rather than government debt fell this month to 4.23 percentage points, the least since 2007. Spanish 10-year yields have dropped to about 4.20 percent from 5.17 percent at the end of January.

A Sareb spokesman declined to comment on the sale and Christina Milner, a spokeswoman for KPMG’s Spanish affiliate, KPMG Asesores SL, did not respond to a request for comment.

Sareb holdings also include 76,357 vacant and 6,293 rented homes, along with 14,859 parcels of land. The institution also owns property development loans, for 61,702 finished and 3,924 projects under construction, according to Sareb.

Economic Troubles

“Spain is still suffering from rising unemployment, bankruptcies and declining confidence, so the bad bank may want to wait another few years before selling more assets in order to realize more value as economic conditions gradually stabilize,” Tyrrell-Hendry said.

Sareb is already luring foreign investors and private equity firms, which have been negotiating to purchase properties, according to people with knowledge of the negotiations.

Apollo, which raised a $3.6 billion fund last year to invest in European non-performing loans and other assets, may be interested in buying completed apartment units close to large cities, which would need to be rented or sold, according to two people familiar with the matter who asked not to be identified because the strategy is private.

Charles Zehren, a spokesman for New York based Apollo, declined to comment. The investment firm oversees $113 billion.

Unfinished Residential

Colony, which has bought about $50 billion of real estate since it was founded in 1991, is seeking to finance well-located unfinished residential assets, said people familiar with the matter, who also asked not to be identified because the negotiations are private.

Lisa Baker, a spokeswoman for Los Angeles-based Colony, declined to comment.

Wilbur Ross said May 20 on Bloomberg Television he will visit Spain later this week. He’s weighing investing in its banks amid signs the country is starting “to come to grips” with its financial crisis and will consider buying assets put up for sale by Sareb.

Property Challenges

The bad bank faces challenges in selling its real estate. Around 400,000 foreclosures have been ordered in the country after the decade-long property bubble burst in 2008 and unemployment is the highest in at least 37 years. Mariano Rajoy’s People Party is pursuing the harshest austerity measures in the country’s democratic history to curtail surging borrowing costs that last year pushed Spain to the verge of a bailout.

Voters have elected populist politicians in some regions advocating measures that complicate asset sales. In Andalusia, the regional government is planning to expropriate foreclosed properties for as long as three years.

Home prices will fall a further 20 percent over the next four years as “precarious” economic conditions deter buyers and as “swathes” of unsold housing stock drag on prices, Sophie Tahiri, a Paris-based economist for Standard & Poor’s, wrote in a report last month.

Sareb is also competing for buyers with banks that didn’t receive bailout funds and also are trying to sell assets.

CaixaBank SA is selling 12,000 homes valued at 1.5 billion euros, Spain’s El Confidencial reported last month.

FAB Funds

Romana, former secretary general of the Circulo de Empresarios and an ex-board director of Banco Santander SA’s consumer unit Banesto, wants to find buyers wherever she can to ensure the bad bank dies within the 15-year horizon.

In addition to sales through retail channels, Sareb is setting up Spain’s first Bank Asset Funds, or FABs, which will be tax-attractive vehicles designed to appeal to foreign investors. Their creation and operation will be supervised by the Spanish stock exchange commission.

“For Spain to get out of its current economic woes, it needs to get rid of a lot of the dead weight that is sitting in the banking sector,” said MC Asset’s MacDonald. “The bad bank plays a role in terms of helping to get the bad assets out of the system, to restructure them and be able to sell them off. It adds a positive factor, but you have a fair amount of work ahead of you.”

Before it's here, it's on the Bloomberg Terminal.