The Spanish agency responsible for restructuring the country’s banks — FROB — today released its design and structure for the asset management company that will serve as the nation’s “bad bank” — Sareb. The asset management firm was established under a July agreement among the European Central Bank, the European Commission, the International Monetary Fund, and the European Stability Mechanism. Sareb will be established as a for-profit company that will not be part of Spain’s central government.

The bad bank will accept foreclosed assets totalling €100,000, loans and credits to real-estate developers valued at €250,000 or more, and corporate holdings linked to the real-estate sector. Initially assets will come from four banks and the total value of the assets has been estimated at €45 billion. Another €45 billion will be made available to a second group of banks later. Sareb has no more than 15 years to straighten the mess out.

The estimated transfer value of all the assets sent to Sareb will be discounted an average of 63%, with the discount on real-estate reaching 79.5%, 63.2% for unfinished housing, and 54.2% for completed housing. That’s some haircut.

Sareb projects three main sources of funding: state-guaranteed senior debt issued by Sareb in exchange for the assets it receives from the banks; perpetual subordinated debt; and equity. The bad bank estimates a return on equity of 14% to 15%.

About the only good thing to say about this is that the €45 billion in assets coming from the first group of banks is lower than the €60 billion estimate provided by the stress tests performed on Spanish banks earlier this year.

The announcement from FROB is available here.

Paul Ausick

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