Banks to be Hit by Major Property Developers Bombshell.
Marbella
During the first six months of 2012 Spanish banks are expecting to take on board a huge number of foreclosed and repossessed properties owned by real estate companies and builders. It is worth asking ourselves why this new tsunami of foreclosed and repossessed properties is expected now and not earlier, and why the banks think that there will be a deluge of properties instead of a steady flow of new bank repossessions in Spain
In order to answer this question we need to go back to 2009, when many real estate companies, developers and builders were facing suspension of payments or, to describe it in present day terminology, insolvency proceedings. At that time, between 2008 and 2009, the banks frequently had to decide whether or not they should refinance developers and builders who were in difficulties.
The banks knew that if they did not refinance these companies they would have to file for insolvency, in which case the bank would be merely another credit or in the proceedings. However, if they refinanced the companies and supervised the way they were run in collaboration with their owners they could try to refloat them or make them viable.
The banks chose the latter option, to refinance, for several reasons:
1) By refinancing they could extend the existing guarantees in rem and loans granted, thereby increasing their mortgage and personal guarantees (credit agreements, leases, loans etc.) with respect to the whole of the company’s assets, and not just the assets which the company had already mortgaged. This meant that they could protect themselves better. In other words, we could say that the bank widened its safety net.
2) If they refinanced, they could wait for the general situation of both the economy and the country to improve, which would mean that they would not have to call in the guarantees.
3) In many cases refinancing was preferable to making bad debt provisions on losses.
It must be highlighted that refinancing, especially for large companies, was usually undertaken by a pool, or group, of banks.
However, the Insolvency Act 22/2003 of 9 July established that any disposals of assets made by the debtor (the company) two years prior to the opening of insolvency proceedings could be annulled if they were detrimental to the body of creditors. This means that if a refinanced company filed for insolvency within the two years following the refinancing, by law any of the additional guarantees that the banks had managed to obtain might be “cancelled”, as they could be deemed to be detrimental to the other creditors because they reduced the assets that could be attached, and the creditors´ likelihood of collecting their debts. In other words, the measures taken by the banks to cover their backs could be considered to be detrimental to the remaining creditors, and “cancelled” by law.
As a result numerous companies were kept on “artificial respiration” from the moment they were refinanced, and their payments were monitored by the banks, as they wanted to prevent them from having to file for insolvency. The reason for this is because if the company filed for insolvency the additional guarantees obtained by the banks could disappear, as the two year-period stipulated by the law had not yet expired.
However, more than two years have now elapsed since the refinancing of many companies, and the outlook for many of these construction and development companies continues to be problematic. It is therefore highly likely that the banks will decide that it is in their best interests, and the lesser of two evils, to call in the mortgage guarantees instead of providing more refinancing, as the additional guarantees they obtained from the companies cannot now be annulled.
As a result, it is likely that a large number of developers will lose their assets over the coming months, since the current financial situation is unsustainable
