Spanish NPL market faces Catalonian crisis

Independence vote casts new light on NPL portfolios on the market.

The teasers of two Spanish non-performing loans portfolios hit the market between the end of September and the beginning of October, in the range of a few days one from the other. So far this year, according to Debtwire data, the Spanish NPL market has seen 14 deals in a range of EUR 100m to EUR 1bn, for a total of EUR 6.2bn, and one jumbo deal: Santander’s sale of a share of Banco Popular’s EUR 30bn in assets to the Blackstone Group. With such an active market, the two new portfolios, one at a gross book value of EUR 794m, the other at EUR 500m, both backed by commercial real estate, were interesting, albeit not particularly remarkable, according to three sources familiar with the situation.

That is, until last Sunday’s vote in Catalonia. The consultation – with an alleged turnout of 42% voting heavily in favour of the independence of the Catalonia region -- has turned into a real possibility of a unilateral declaration of secession, even though Spain’s Constitutional Court ruled it illegal.

Catalan-headquartered banks have reacted quickly. First, Banco Sabadell has decided to relocate its legal base to Alicante.  Then, CaixaBank, Spain’s third-largest bank and Catalonia’s first-largest, said on Friday it had decided to relocate to Valencia.

In such a turmoil, the fate of the two NPL portfolios, Sabadell’s Project Voyager and Caixabank’s Project Tribeca, shows the many possibilities faced by investors in front of the crisis.

Investors eye Voyager, Tribeca exposure

Both still at the non-binding offers stage, the processes of sale of the portfolios are still ongoing, the three sources familiar said. It would be harder if the investors had to be forced to move on with a binding offer in the current uncertainty, they said. Still, what will happen later remains a question mark.

Sabadell’s EUR 794m Project Voyager consists of 250 positions, mainly corporate and hotels. It has an approximately 23% exposure to Catalan assets, according to the first and second sources familiar with it.

Caixabank’s EUR 500m Project Tribeca consists of a mix of real estate including industrial and land, with a limited exposure to Catalonia, said the third source familiar.

With such limited exposure to the Catalan market, investors can simply decide to move ahead with offers asking the banks to carve out the Catalan assets, the first and second sources pointed out.

With 7.4m people, Catalonia accounts for 16% of the Spanish population and 20% of its GDP (EUR 215.6bn out of a total EUR 1.1tn). In the second half of 2017, Barcelona's office market registered a record take-up of 143,000 sq m, taking the first half 2017 figure to a total of 227,000 sq m, up 54% year on year and the best on record, according to CBRE. Lack of space sent rents up in the second quarter, reaching EUR 23 per sq m, up 8% year on year.

Several months delay possible

Still, banks and companies have shown that in cases of protracted uncertainty, they can act quickly and the office market can suffer. At Expo Real in Munich, where the European real estate world gathered this week, market players spoke about office sales and office finances delayed in Barcelona, in a wait and see mood. Catalonia had a stand at Expo. The banner read, “Why? Barcelona Catalonia.” The joke around was: Yes, why Catalonia?

In Madrid, where Debtwire had a series of meetings through the week, not many were in the mood to joke. Even the most upbeat believers that business can go on as usual acknowledged that delays will be inevitable.

The obvious parallel was with Brexit. In the aftermath of the UK referendum to leave the European Union, on 23 June 2016, Banco Sabadell delayed the sale process of its EUR 1bn NPL Project Normandy. Offers were initially expected to be asked in July, as Debtwire reported, but the seller decided to postpone the process due to the uncertainty in the market. At the same time, CaixaBank delayed the sale of the EUR 500m portfolio Project Sun, the second source familiar recalled. Both portfolios eventually were sold: Project Sun to Apollo Global Management in October 2016, as reported (Debtwire, paywall), and Project Normandy to Oaktree Capital in January 2017, as reported (Debtwire, paywall).

The situation might be similar right now. “It will only be a delay of a few months,” the second source said. Most market players interviewed by Debtwire in Madrid believed that the crisis will go away and that a secession cannot happen.

Discount opportunity?

Still, a lawyer admitted that his own mother was moving her savings from a Catalan bank.

An advisor wondered, “Would you buy a house in Barcelona today?” In a world of opportunistic investors, the answer for some was -- actually, yes. An investor pointed out that the risk can be an opportunity to obtain further discounts from banks.

The third source familiar with the situation considered that the competition in Spain was already lower than in Italy, while the opportunities remained. Investors who are already on the market will stay and could profit from uncertainty, he said.

“The office market can be affected, but there will still be appetite for residential, people will still need houses,” the representative of a seller said. The recovery of the residential real estate is way ahead. In the first half of the year 265,000 houses were sold in Spain, 15% more than in the first semester of 2016, showed a recent BBVA report, which forecast a total of 500,000 sales for the entire year.

In the Spanish NPL market, the bad bank Sareb could see an impact from the uncertainty. According its most recent report, for the first half of 2016, 20.5% of the value of its portfolio of real estate assets and 16.2% of the primary borrowers portfolio is in Catalonia. The bad bank is at the final phase of the sale of EUR 500m Project Ines, a person familiar said. It has been implementing a wide range of strategies to speed up the sale of a portfolio which in the latest report still totalled EUR 42bn.

Project Winter in the works

Among these strategies, as reported from the Spanish press and confirmed by a person familiar to the situation, is the listing of a Socimi (a Spanish Real estate investment trust) on the alternative investment market Mercado Alternativo Bursátil. Almost half of the properties will be located in Madrid, but there should be also a 30% in Barcelona, the person said. A protracted political uncertainty could potentially delay an IPO, expected by mid-December, the person said.

With all eyes on the next move in Barcelona, so far in Madrid’s offices, it is business as usual. Banco Sabadell is actually working on a new portfolio, according to two sources familiar with the deal. It is due to be a EUR 500m portfolio of work in progress, the sources said. The marketing was due to start in about month. The portfolio has been dubbed Project Winter.

by Alessia Pirolo

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