During August 2013, the Spanish bad bank (Sociedad de
Gestión de Activos Procedentes de la Reestructuración
Bancaria, S.A., or "SAREB") completed the bidding
process for its first sale of a REO portfolio (project
"Bull"), awarding to HIG Capital through its affiliate
Bayside Capital. The portfolio consists of a total of 939
residential units and 750 parking and storage units valued at
€100 million.
The transaction was structured through a FAB(Fondo de Activos
Bancarios or Bank Asset Fund), the first to be created in
Spain. The FAB will operate as a joint venture (SAREB will have a
49 percent shareholding in the FAB, while HIG Capital will hold the
remaining 51 percent).
FABs are a new type of investment vehicle specifically created to
attract investors based, inter alia, on its tax benefits
and flexibility, in order to facilitate dispositions of assets by
the bad bank.
SAREB plans to release new portfolios using these investment
vehicles in open and competitive processes. As an example, project
"Teide," involving the sale of a portfolio composed of 36
finished residential buildings, six developments in progress, and
four plots of land, will also be structured through a FAB.
Advantages of FABs
FABs are new investment vehicles specifically designed and
regulated to market SAREB assets. The use of FABs may consist of a
joint venture between the buyer and SAREB (as co-investors). This
structure has benefits for both SAREB and investors:
For investors:
- Liquid and transparent vehicle, managed by a professional entity.
- Highly advantageous special tax regime: the vehicle is taxed at 1 percent corporate tax while investors' returns will not be subject to withholding tax under certain conditions (similar to the tax regime for public debt) if the investor is a nonresident with no permanent establishment in Spain.
- Flexibility: the nature of FABs facilitates structuring relationships between financial partners and, in particular, with SAREB, which may participate itself in the financing, thereby reducing the capital required.
- Transfers to FABs of debts of companies in which SAREB holds an interest shall not rank as subordinated in the event of the company commencing an insolvency proceeding. Such exception will not apply if those debts were qualified as subordinated in an already opened insolvency proceeding upon their transfer to SAREB.
For SAREB:
- Benefit from potential increase in value of real estate or financial assets transferred to the Fund.
- Difficulty in setting prices for certain types of assets, given their complexity and risk, can make it more attractive for SAREB to share risks and profits in co-investment than to simply transfer or write off at a loss.
- At the same time, SAREB can generate cash from the initial transfer of assets to the FAB.
FABs: Investment Funds or Securitization
Funds?
FABs are initially integrated by a combination of assets and
liabilities from SAREB and may be created only by SAREB, but FABs
have no legal personality. In principle, they are a hybrid between
asset securitization funds and collective investment vehicles (in
fact, FABs must be managed and represented exclusively by regulated
and registered asset securitization fund managers, not by managers
of collective investment institutions, such as Investment
Funds).
FABs are governed by the provisions of Law 9/2012 governing the
restructuring and resolution of financial institutions ("Law
9/2012"), and Royal Decree 1559/2012 governing asset
management companies ("RD 1559/2012"). The regulation
governing asset securitization funds and collective investment
institutions will also be applicable.
FABs may issue securities subject to the provisions of the Stock
Exchanges legislation. The placement of such securities will be
possible only among professional investors, and the minimum unit
value of the securities issued will be €100,000.
However, SAREB is not expected by market players to make public
offers to potential investors of securities issued by FABs; rather,
investors will want to structure through FABs the acquisition of
large portfolios of loans and/or real estate in a flexible and
fiscally advantageous manner. In any case, under the current
legislation, it would be possible to consider securities issued by
FABs as a structured product for placement with professional
investors, if structurers believe there is potential in the
market.
Tax Regime
The tax regime will be applicable as long as SAREB itself
remains exposed to the FAB, which will, as a maximum, be the
expected life of SAREB (until November 2027, i.e., 15 years from
the incorporation of SAREB). Once the period of exposure of SAREB
to the FAB is over, FABs will transfer to the general Corporate Tax
regime.
FABs shall pay Spanish corporate tax at the rate of 1 percent. If
the FAB participants are subject to the payment of Spanish
nonresident income tax and do not have a permanent establishment in
Spain, they will benefit from the same exemption that applies to
returns from Spanish public debt (i.e., no withholding).
If FAB participants are subject to Spanish corporate tax, personal
income tax, or nonresident income tax with a permanent
establishment in Spain, they will pay tax like partners and
participants in collective investment institutions.
Creation, Assets, and Liabilities of FABs
FABs must be created under a notarial deed with a minimum
content (including assets on incorporation, manager, duration,
etc.) to be filed with the National Stock Exchanges Commission
(Comisión Nacional del Mercado de Valores,
or"CNMV").
FABs will initially comprise assets and liabilities transferred
from SAREB. Assets eligible for transfer to FABs are not only those
previously acquired by SAREB from financial entities. The following
asset classes may be transferred to FABs:
- Assets transferred, directly or indirectly, by SAREB, as well as other assets acquired by subrogation or transformation of the above, generated from the same or connected therewith.
- Cash, demand, and term deposits with financial institutions.
- Fixed income securities admitted for trading on official secondary markets.
Liabilities of FABs may comprise:
- Liabilities transferred by SAREB.
- Securities of any type issued by the FAB.
- Loans or credit facilities.
- Contributions from institutional investors, who shall be entitled to the proceeds from the eventual liquidation of the FAB after payment has been made to the remaining creditors.
- Regular liabilities generated in the conduct of the typical activity of the FAB.
Transfers of assets by SAREB to FABs will be completed without
approval from third parties and without the requirements imposed on
structural modifications of commercial companies. Furthermore, such
transfers will not be exposed to "claw back"
actions under the Spanish insolvency legislation. Transfers must be
full and unconditional. SAREB may not grant any warranties to the
FAB or secure collection of receivables or the value or quality of
the assets transferred.
FAB Divisions, Merger, and Spin-Off
The assets of a FAB may be organized in separate divisions
(compartimentos). Securities may be issued or obligations
of different kinds may be assumed against a specific division. The
portion of a FAB's assets allocated to each division will
respond exclusively for the liabilities expressly allocated to such
division, together with the proportional part of those assets that
have not been expressly attributed to other divisions. Creditors of
a division may enforce their credits only vis-à-vis the
assets of said division.
FABs and their divisions may merge (i.e., transfer of all the
assets and liabilities from one or more FAB or division to another
new or preexisting FAB); and spin-off (i.e., transfer certain
assets or liabilities from a FAB or division to one or more new or
preexisting FABs).
In FAB merger or spin-off deals, creditors shall have a right to
object during a one-month period from publication of the relevant
proposal. However, the deed of incorporation of the FAB may provide
for a regime of exclusion or limitation of this objection right,
provided that creditor representation bodies are established with
collective decision-making mechanisms.
Management and Reporting
FABs can be managed only by registered asset securitization fund
managers, regulated by CNMV. These managers will not act as
property managers but only as trustees and vehicle servicers. FABs
may contract expert asset managers, which will be controlled by the
manager.
The share capital of the manager will be a function of the value
of the FAB's assets. The manager's compensation will be
calculated following procedures in line with the investment and
risk management policy of each FAB, avoiding the creation of
incentives that are contrary to the targets of such policies.
Compensation for top executives and key employees will be based on
the same principles.
The manager of each FAB must publish on its website the deed of
incorporation and other public deeds granted in connection with
each FAB, as well as the documentation whereby contributions of
assets or liabilities are made at a later date, the six-monthly
report, and the annual report for each FAB that it manages. CNMV
may request additional information.
The annual report that the manager shall produce will contain,
inter alia, the duly audited financial statements, a
breakdown of the assets transferred to the FAB, a breakdown of the
liabilities of the FAB and a breakdown of the financing agreements.
Such annual report will be sent to CNMV for recording at the public
registry within four months from the end of the previous financial
period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.