Guaranteed funds under pressure in Spain

What do you do when existing regulation threatens your most successful fund sector? According to the Spanish regulator, relax credit rating criteria for guaranteed funds.

The CNMV, Spain’s financial regulator, is reviewing credit rating requirements for the guaranteed fund sector. It aims to avoid regulatory arbitrage that could worsen the tax position of investors if guarantees are called upon.

The change will also allow the weakest Spanish retail banks and savings banks (‘cajas’) to continue providing in-house guarantees on their most popular funds. Even if permitted, they may not want to.

The bad news keeps piling up for banks. Credit rating agency Fitch recently added fresh doubts to the exact amount of provisioning the industry must make on r­epossessed properties. New figures from the Bank of Spain show arrears on corporate and housing loans recently topped 8.16%, prompting fears of further ratings downgrades and bailouts.

The flipside to falling ratings is the impact on savers and investors. Spanish banks were locked in a vicious deposit war (known as the ‘guerra de depósitos’) to attract capital-boosting cash until the previous government stepped in to cap interest rates.

The banks have sold large tranches of convertible bonds and promissory notes to retail savers to bolster their b­alance sheets. Santander issued a €7bn convertible bond in 2007 to finance its share of the ABN AMRO acquisition. Others followed, tempting many mutual fund investors to switch products.

Savings battleground

The battle for savers and capital has hit mutual funds hard. Assets under management dropped from a peak of €254bn in 2006 to €130bn at the end of March this year, according to figures from Inverco, the Spanish funds industry association. Domestic asset managers are also feeling the heat directly from falling credit ratings.

Providers of guaranteed funds are struggling to source guarantees on investors’ capital as their parent banks and mutual cajas de ahorros are downgraded.
Those whose parent group ratings drop below certain thresholds have had to withdraw from the market or change the way capital guarantees are given on new ­products.

The CNMV is now considering modifying the law, ­Circular 6/2010. It wants to stop regulatory arbitrage between different forms of fund guarantees hitting ­investors’ tax bills should guarantees be called upon to make up capital losses.

The industry has lobbied for change to guarantee rules to avoid the banking crisis destroying its most successful fund sector. A spokesperson for Ahorro Corporación says: “The general rating downgrade of Spanish financial ­institutions has led to fewer and fewer entities being able to offer internal fund guarantees as they fail to meet the Circular de Derivados solvency criteria.”

Capital-protected fixed and variable return funds are popular with Spanish investors. The funds account for 41% of all Spanish fund assets. They generally come with full capital guarantees, limited withdrawal windows and fixed terms up to five years.

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