6.4.4.4 Example 4: The transfer of non-performing assets to an AMC under the asset separation tool

In the cases of Carichieti, Carife, Banca Marche and Banca Etruria, non-performing loans (NPLs) were transferred from the bridge bank to an Asset Management Company (AMC). The NPLs were transferred above market prices according to the provisional valuation corresponding to EUR 85 million. In return for these NPLs, the bridge bank received debt securities from the AMC with the same notional amount. The resolution fund guaranteed these debt securities in the full amount. The Commission considered the transfer of the NPLs from the bridge bank to the AMC to constitute State aid; it identified the beneficiary of the aid as the bridge bank. 2

In the resolution of BANIF, impaired assets were transferred to an AMC. All other assets, rights and liabilities not included in the perimeter of the transfer to the AMC and which were not sold under the sale of business tool (as discussed in section 6.4.4.3) remained in BANIF as a residual bank to be wound up in normal insolvency proceedings. The assets remaining in the residual bank included own shares of BANIF and any shares or units that represented the share capital of international subsidiaries of BANIF. The portfolio to be transferred to the AMC included loans, real estate assets, restructuring funds, loans to restructuring funds, real estate funds, and equity stakes. The AMC was financed by share capital provided by the Portuguese resolution fund, the sole and controlling shareholder of the AMC, and the issuance of bonds guaranteed by the resolution fund and counter-guaranteed by Portugal, subscribed by BANIF, and subsequently transferred to the private sector purchaser.3 The Commission considered that the AMC was capitalized and controlled by the resolution fund and that the transfer of the portfolio from BANIF to the AMC occurred above market prices. It also concluded that the other conditions for the existence of State aid to the economic activities to be transferred to the private sector purchaser were fulfilled.4

The resolution of MKB Bank entailed three groups of measures: (1) clean up MKB Bank’s balance sheet to increase capital adequacy and improve profitability, (2) reorganize with a view to enhance efficiency, and (3) sell MKB Bank after the implementation of the asset separation tool. The aim of the asset separation tool was to remove uncertainty about the future value of MKB Bank’s most problematic assets so that it could concentrate on the implementation of the restructuring plan and restore its viability. The clean-up of the balance sheet appeared to be more difficult than expected as a result of which a substantial part of the assets still remained unsold after the sale process and had to be transferred under the asset separation tool to the AMC. The assets and liabilities of MKB Bank that were not sold or transferred to the AMC remained in MKB Bank (the core bank). As a result of the burden-sharing requirement, the shares in MKB Bank were transferred to the AMC, which is fully owned by the resolution fund. The resolution fund had to sell its shares through an open, transparent and non-discriminatory sales process by the end of June 2016.5 The application of the asset separation tool contained an element of State aid because the transfer of the assets to the AMC took place above the market value of the assets. 6

In the cases of Carichieti, Carife, Banca Marche and Banca Etruria, the Commission considered that non-performing loans could be eligible assets for an impaired assets measure.7 In the case of BANIF, the Commission considered that the impaired measure was targeted not only at non-performing assets, but also contained a large number of heterogeneous asset classes. Most of these asset classes – non-liquid real estate exposures, real estate funds, restructuring funds, as well as NPLs – came with significant impairments and would be very difficult to sell in the market unless at significant discounts.8

In the case of MKB Bank, the impaired assets measure was targeted at speculative transactions with land plots and hotels, as well as foreign currency-denominated assets that were not backed up by revenues in the same currency. All transactions in the transfer were non-performing. The Commission therefore assessed that the assets were in line with the eligibility criteria of the Impaired Assets Communication.9

In the cases of Carichieti, Carife, Banca Marche, and Banca Etruria, the Commission considered that the transparency requirements were challenging for the transaction. It noted positively that all assets to be transferred were clearly identified as defaulted loans in the Sofferenze category, including a breakdown of each collateralized and uncollateralized part of the portfolio into retail and corporate loans. No complex assets or structured products were being transferred. The Commission further took into consideration that the measures were implemented in resolution in the specific framework of a sale or winding up in an orderly manner commitment in a very short timeframe. It therefore regarded the transparency requirements as fulfilled.10 A same assessment was made by the Commission in relation to BANIF.11 In the case of MKB Bank, the Commission considered that a list of assets to be transferred and extensive valuation reporting and loan documentation were provided, facilitating the Commission’s assessment.12

In the cases of Carichieti, Carife, Banca Marche, and Banca Etruria, the Commission relied on the provisional valuation prepared by the Bank of Italy on the basis of Article 36 BRRD, because it did not have sufficient information about the portfolio to pronounce itself conclusively on the precise value of the REV. It considered that it was, however, possible to establish with reasonable confidence that the transfer value was lower than the appropriate REV of the portfolio and that the aid provided through the transfer could be compatible with the rules of the internal market.13 In addition, Italy would provide the Commission with the results of the final valuation as soon as they were available.

In the case of BANIF, the Commission considered that a rough estimate for the REV could be calculated, but that the timelines for the proposed impaired asset measure did not allow for compliance with the valuation requirement.14 It even stated that the very short time delay in which the asset separation tool is normally conducted seemed to be in direct conflict with the requirements of ex ante valuation.15

In the case of MKB Bank, the Commission assessed that the Hungarian authorities had provided detailed documents explaining how the MV and the REV of the asset transfer to the AMC was calculated. The Commission subsequently scrutinized the valuation and the underlying methodology in order to ensure a consistent approach at Union level. The final valuation of the Commission’s expert concurred with Hungary’s assessment of the MV and REV.16

In the cases of Carichieti, Carife, Banca Marche, and Banca Etruria, the Commission considered that the NPL to be transferred from the bridge bank would be managed by the AMC, which was fully independent from the bridge bank.17 The Commission made the same assessment in relation to the transfer in the case of BANIF and MKB Bank of non-performing assets to the newly created AMC.18

In the case of BANIF, the Commission considered that if it is not in a position to ensure that the transfer value is lower than the REV, the aid can only be accepted if conditions are introduced “allowing the recovery of this additional aid at a later stage, for example through claw-back mechanisms”. The Commission noted in its decision on BANIF that in view of the delayed assessment of the REV in this case, a claw-back mechanism would be difficult to implement because of the legal uncertainty related to such a claw-back. However, it concluded that because of the extremely conservative value for the proposed transfer value of EUR 746 million, the likelihood would be very low that the full valuation later would find a REV lower than this amount.19

In the case of MKB Bank, the asset separation tool was applied as part of the restructuring. The Commission therefore considered the aid element in the application of the asset separation tool to be restructuring aid in the form of an impaired asset measure. It assessed the aid on the basis of the Restructuring Communication and the Impaired Assets Communication. As a result, the requirements set out for restructuring aid were also taken into account (e.g. restoration of long-term viability, own contribution and burden-sharing and measures limiting distortions of competition). As part of its assessment of the burden-sharing requirement, the Commission took into account that the sole shareholder of MKB Bank, the Hungarian State, was fully written down, that the resolution fund via the AMC became the sole shareholder of the core bank, and that there were no subordinated debt holders in MKB Bank.20

In the cases of Carichieti, Carife, Banca Marche, Banca Etruria and BANIF the aid element in the application of the asset separation tool was considered liquidation aid in the form of an impaired asset measure that had to be assessed on the basis of Section 6 of the 2013 Banking Communication in addition to the Impaired Assets Communication.

In the case of BANIF, the Commission was confronted with the fact that the requirements of the Impaired Assets Communication could not be met upfront. The Commission considered that the assessment framework set out for liquidation aid under the 2013 Banking Communication did not provide for the possibility of providing impaired asset measures on the basis of temporary approval. In order to ensure that the intention of the European Co-legislators can be accommodated in the State aid framework, the Commission however considered that the conditions of Section 3.2 of the 2013 Banking Communication (enabling rescue aid in the form of impaired asset measures) also applied mutatis mutandis to liquidation aid in resolution. It therefore considered that in this very specific case in which BANIF ceased to exist within a very short timeframe and was fully assumed into a much larger entity, it could grant the temporary approval of the impaired asset measure on the basis of a very conservative transfer value for a period of three months, requiring a full valuation of the market value and real economic value during that time, and approving the measure finally in a second decision.21 In this second decision, the Commission considered that the difference between the market value established by external experts appointed by the Commission and the net transfer value (that difference being the State aid amount) was actually lower than calculated in the first decision. In addition, the net transfer value was lower than the real economic value as a result of which the transfer occurred in line with the Impaired Assets Communication. Moreover, the asset classes that were transferred in a higher proportion still satisfied the eligibility criteria of the Impaired Assets Communication. The Commission therefore concluded that the impaired asset measure was compatible with the internal market.22