Nordic bank SPVs start work on bad Baltic loans

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.

SEB has three SPVs – Estectus in Estonia, Litectus in Lithuania and Latectus in Latvia – and a source at SEB in Stockholm says all three started acquiring assets in November. They currently own between 50 and 100 commercial properties between them, and a flood of assets is expected during 2010 and 2011 as the bank works its way through a growing number of distressed loans.

Swedbank is doing the same, for both commercial and residential loans, with a host of SPVs organised under a start-up property subsidiary, Ektornet. Oskar Lundeberg, a veteran of the Swedish crisis, will take over the post of chief executive at Ektornet from Swedbank's chief risk officer, Göran Bronner, at the end of this year. The company currently owns just a couple of hundred million kronor of assets, Lundeberg says, but he anticipates up to Skr10 billion kronor (€1 billion) making its way to Ektornet over the next two years.

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."

That's exactly what SEB did almost two decades ago, creating Diligentia, a subsidiary that was eventually sold off and is now one of the biggest property companies in Sweden. The road from portfolio of non-performing loans to gleaming new enterprise is full of obstacles, but SEB, Swedbank and other lenders such as Danske Bank and Nordea, feel they have no choice.

"I think the Nordic banks have learned from their lessons in the property crisis in Sweden, and know that if they just hold on to the assets they will eventually recover. Therefore they are setting up SPVs in each country to buy the assets at auction sales and put them off the market until confidence returns. Swedbank has already done quite a bit and SEB has started too," says a second source at SEB in Stockholm.

The January issue of Risk will take a detailed look at the Nordic banks' strategy and the challenges they face.