A “toxic asset pool” rears its ugly head…
Nordic banks are beginning the long process of tidying up their bad Baltic property loans, with all four of the most exposed institutions creating special purpose vehicles (SPVs) in the last couple of months to take ownership of loan collateral. The strategy will leave the banks owning and managing large numbers of offices and retail properties in the region while they wait for markets to recover – which is expected to take five years or more.
A few questions I have:
Are the SPVs bankruptcy remote from the banks? Because without true risk transference, this whole thing is pointless. The banks need to get the stuff off their books so they can stop taking charges against their capital structure. That won’t make them lend again in and of itself, but there would at least be an end to taking capital charges as their balance sheets deflated.
Where will the equity come from? Will it be from private investors, taxpayers, or some combination? If there’s a combination of public and private investment involved, public money has to be safeguarded by being placed in the capital structure at a senior level to the private money.
What’s the mark on the property being taken over by the SPVs? If the value is still at par, these things will need many, many years to recover. The banks wouldn’t take a loss, but the investors into the SPV would. If it’s less, then it’s a question of how much further down the property’s value goes. Chances are there will be a second leg down, but how far and how long remains to be seen.
The alternative is not very appealing:
The alternative for both institutions would be to sell their collateral into a property market that has crashed spectacularly. In Riga, for example, prices for the Soviet-era apartments that make up around 85% of the city’s housing stock dropped from a pre-crisis peak of €1700 per square metre to a trough of €460 – a drop of 70% or so, according to one Latvia-based banker with another western institution.
“It’s like a completely illiquid bond market where the prices you get are fire-sale prices,” says the SEB source. “If you’re not in a bind for capital and not in a bind to show profits, it might be more efficient to hold onto the assets until the liquidity has returned.”
Has it occurred to anyone that the only bid they’ll get is a distressed bid? Like a Nikkei investor who bought in 1989? How is that going for them? By the looks of things, still not so good – and it’s 20 years later.
Someone will have to be the bag holder eventually. The sooner it gets spelled out as to who it is (it should be the banks that lent on these deals and the borrowers) and how much pain is involved, the sooner we can put it all behind us and move on.