14 May 2012


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:


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




Ongoing development



Completed development



Without in rem guarantees



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.



The information contained in this Newsletter is of a general nature and does not constitute legal advice