Royal Decree-law 18/2012 of 11 May, on the write-down and sale of
real estate assets of the banking sector (“RDL 18/2012”) entered
into force and was published in Spain’s State Official Gazette on 12 May
2012. RDL 18/2012 is a further step in the reform of the Spanish banking
system that was initiated by the current government with Royal
Decree-law 2/2012 of 3 February, on the banking sector reform (“RDL 2/2012”)
(open
newsletter).
The purpose of RDL 18/2012 is to dispel the uncertainties that are
hindering the recovery of the Spanish financial sector and its ability
to take on its role of channelling savings into the real economy.
The main changes introduced by the RDL 18/2012 are the following:
1. ALLOCATION OF ADDITIONAL PROVISIONS FOR “standard RISK” REAL
ESTATE ASSETS
RDL 2/2012 imposed a “general” 7% provision for lending related to
the acquisition of land for real estate developments, real estate
developments and constructionsin Spain (“Real Estate-Linked Lending”),
in place as at 31 December 2011 and that were classified as standard
risk. RDL 18/2012 imposes an additional obligation to make the following
provisions:
|
Type of Real Estate-Linked
Lending in place as at 31/12/11 and classified as standard risk |
RDL 2/2012 coverage percentage |
RDL 18/2012 additional
coverage percentage |
Total coverage percentage |
|
With in rem guarantees |
Land positions |
7% |
45% |
52% |
|
Ongoing development |
22% |
29% |
|
Completed development |
7% |
14% |
|
Without in rem guarantees |
45% |
52% |
If, prior to 31 December 2013, any such lending is reclassified as
substandard or doubtful or generates an actual loss, it may be covered
using the general provision. The Bank of Spain will determine the use to
be made of the retained earnings of these provisions after 31 December
2013. RDL 18/2012 does not increase the specific provisions for Real
Estate-Linked Lending classified as substandard or doubtful or for asset
foreclosures or assets received as payment of Real Estate-Linked
Lending, or the additional capital buffer required by RDL 2/2012.
The additional coverage required under RDL 18/2012 must be allocated
by 31 December 2012. However, in line with RDL 2/2012, a 12-month
extension from the date the integration is authorized is allowed for
those entities that undergo “integration processes” in 2012. That said,
the conditions imposed by RDL 18/2012 that integration processes must
meet to delay the allocation of additional provisions seem at first
glance less demanding than those established under RDL 2/2012 in order
to defer (also by up to 12 months) the coverage and supplementary
capital requirements that the latter imposes. For example, RDL 18/2012
does not require that the total balance sheet of the resulting entity be
at least 20 % (10 % in exceptional circumstances) higher than the total
balance sheet of the business in Spain of the largest entity involved in
the integration. It is enough that the integration process brings about
a “significant transformation” of the participating entities.
RDL 18/2012 also requires Spanish banks to undertake to increase loans
to households and SMEs, but unlike RDL 2/2012, it does not require that
they be quantified or fulfilled within the three years after
integration. Although RDL 18/2012 requires that the integration improve
the corporate governance of the entity, it does so in broader terms than
RDL 2/2012. This is why it would seem possible that entities involved
in integration processes that are too small to delay compliance with the
RDL 2/2012 requirements beyond 31 December 2012 could still defer by up
to 12 months after the integration authorisation their fulfilment of the
additional coverage requirements imposed by RDL 18/2012.
All entities have until 11 June 2012 to submit a plan detailing the
measures they intend to take to meet the new coverage requirements,
which must include an assets divestment plan and a timetable for its
implementation. Those entities left with solvency shortfalls as a result
of making the additional provisions required by RDL 18/2012 may request
assistance from the FROB, which will be granted in the form of bonds
convertible into shares (see section 3 (a)) or newly issued shares.
The deadline for submitting applications to the Ministry of Finance
and Competitiveness for authorisation for credit entity integrations
allowing them to defer compliance with the coverage and additional
capital requirements set out in RDL 2/2012 is postponed until 30 June
2012. RDL 18/2012 does not establish a deadline to request authorisation
for integration processes that enable credit entities to delay making
additional provisions, but a reasonable interpretation of both royal
decree-laws would suggest that the same deadline applies.
2. creation of asset management companies
Under RDL 18/2012, credit entities must transfer certain real estate
assets foreclosures or real estate assets they have received as payment
of debts to “asset management companies”. Although open to
interpretation, it would seem reasonable to assume that the real estate
assets to be transferred are those that (i) as at 31 December 2011, had
already been received as payment of Real Estate-Related Lending, and
(ii) have been foreclosed after that date as payment of this type of
lending in place as at 31 December 2011 (be the lending classified as
substandard, doubtful or standard, and regardless of whether the
foreclosure occurs prior to or after the entry into force of RDL 18/2012
and whether or not the initial contribution to the company has been
made). Exceptionally, in the case of entities in which the FROB
currently has a majority stake or where it has been appointed as
provisional director, the FROB will decide whether or not they must
comply with this obligation.
Transfers to the asset management company must be made prior to 31
December 2012, unless the credit entity is involved in an integration
process that allows the deadline for compliance of the coverage
requirements under RDL 18/2012 and RDL 2/2012 to be extended, in which
case the deadline for transferring the assets will be that of the
corresponding extension.
The transferred real estate assets will be valued at their fair value
or, failing that or where there are difficulties in determining the fair
value, at their book value, which will be determined by reference to
both RDL 18/2012 and RDL 2/2012. If the assets contributed to the asset
management company are not fully provisioned in accordance with these
royal decree-laws, the asset management company must make the same
allowances and within the same period as the contributing credit entity
would have had to. Financial aid instruments (such as asset protection
schemes (APS), although not expressly mentioned) are expected to be
established to facilitate the acquisition of capital in these companies
and, therefore, their deconsolidation.
Entities requesting financial aid from the FROB in order to comply
with RDL 18/2012 must adopt and implement the necessary measures for
their asset management companies to be deconsolidated and become, at
most, associated entities within three years. Moreover, companies
participated by these latter credit entities will be forced to annually
transfer at least 5 % of their assets to third parties other than the
credit entity.
3. Amendment OF the frob aid scheme
RDL 18/2012 amends Royal Decree-law 9/2009 as follows:
(a) Entities that undergo integration processes and
entities that request financial aid to comply with the new provision
requirements under RDL 18/2012 (see section 1) may request the FROB to
subscribe convertible bonds.
(b) In the event that bonds subscribed by the FROB are
converted, the issuer and its shareholders must adopt the resolutions
and take the necessary steps (share transfers and capital reductions) to
ensure that the conversion is carried out according to the entity’s
economic value at the time of the conversion. If the issuer or its
credit entity shareholders fail to take these measures, the Bank of
Spain may provisionally replace the entity’s board of directors and
management until the conversion is completed. This provision will also
be applicable to those convertible securities acquired by the FROB prior
to the entry into force of RDL 18/2012.
4. other matters
(a) Tax treatment of transfers to asset management
companies: the tax neutrality regime set out in chapter VIII of
title VII of the Corporate Income Tax Law may apply to the transfer of
real estate assets to asset management companies in compliance with
RDL 18/2012.
(b) Deferred hybrid instrument payments: entities may
request the deferral, for no more than 12 months, of the remuneration to
be paid on preferred shares and mandatory convertible bonds into shares
issued before the entry into force of RDL 18/2012, or exchanged for
these, in the event that they do not have enough distributable profits
or reserves, or there is a shortfall in equity as a consequence of the
implementation of the new reinforcement measures. This deferral does not
seem to apply to securities issued after the entry into force of
RDL 18/2012 by means other than the exchange of old securities. This
possibility of requesting this deferral should be carefully assessed by
entities with issues are governed by other laws, or which are ranked
differently.
(c) Hybrid-to-share exchanges: RDL 18/2012 provides
that, in circumstances to be determined by the government in a future
royal decree, the issuer of preferred shares and subordinated bonds will
have to offer to exchange these securities for its own shares or shares
in an entity of its group; the royal decree will also set out the
criteria to determine the percentage of the nominal value of the
securities to be exchanged.
(d) Valuation reports: in addition to approving
RDL 18/2012, the Council of Ministers approved an agreement that
instructs the Ministry of Economy and Competitiveness to entrust the
preparation of two external and independent reports on the situation of
the Spanish credit entities’ balance sheets.
MORE INFORMATION: TAX AMENDMENTS APPROVED BY ROYAL DECREE-LAW 18/2012 OF
11 MAY AND THE PRELIMINARY DRAFT BILL APPROVED BY THE COUNCIL OF
MINISTERS ON 10 MAY
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