Resolution of 7 June 2017 by the Governing Board of the FROB to execute the Single Resolution Board's resolution scheme for Banco Popular Español, SA

BOLETÍN OFICIAL DEL ESTADO Núm. 155 Viernes 30 de junio de 2017 Sec. III. Pág. 55470 III. OTHER DISPOSITIONS BANKING RESTRUCTURING FUND (FROB) 7580 Resolution of 7 June 2017, of the Governing Board of the Banking Restructuring Fund, by which it agrees to adopt the necessary measures to execute the decision of the Single Resolution Board, in its extended executive session of 7 June 2017, by which the resolution scheme for the entity Banco Popular Español, SA, has been adopted, in compliance with the provisions of Article 29 of Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010.

Factual Background First. Banco Popular Español, S.A. (hereinafter, "Banco Popular" or "the Bank"), is a Spanish credit institution, with its registered office at Velázquez Street, 34, with Tax Identification Number (NIF) A-28000727 and registered in the Madrid Commercial Register, volume 174, folio 44, sheet H-5458, Registration 1st, as well as in the Register of Entities of the Bank of Spain with code 75.

Banco Popular is subject to consolidated supervision by the European Central Bank and is subject to Regulation (EU) No 806/2014 of 15 July 2014, establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010, pursuant to Article 2(b) of said regulation.

Second. On 6 June 2017, the European Central Bank communicated to the Single Resolution Board (the "SRB") the unviability of the entity in accordance with Article 18.4(c) of Regulation (EU) No 806/2014, considering that the entity cannot meet its debts or other liabilities as they fall due or that there are objective elements indicating that it will not be able to do so in the near future.

Third. In the exercise of its competences, the SRB in its Decision SRB/EES/2017/08 determined that the conditions provided for in Article 18.1 of Regulation (EU) No 806/2014 of 15 July are met, and consequently agreed to declare the resolution of the entity and approved the resolution scheme containing the resolution measures to be applied to it.

The SRB has established that the requirements legally required for the declaration of resolution of the entity concur in Banco Popular, considering that the entity is in severe difficulties, with no reasonable prospects that other alternative private sector measures could prevent its unviability within a reasonable time frame, and that such measure is necessary in the public interest.

Pursuant to Article 18.6 of Regulation (EU) No 806/2014 of 15 July, the resolution scheme subjects Banco Popular to a resolution procedure, determining the application to the entity of the relevant resolution instruments, issuing instructions to the FROB so that it, as the Resolution Authority under Article 2.1(d) of Law 11/2015 of 18 June on the recovery and resolution of credit institutions and investment firms (the "Law 11/2015"), takes all necessary measures to implement it, exercising the resolution competences legally attributed to it.

In this way, the resolution scheme establishes the details of the resolution instruments that must be applied to Banco Popular, which consist of the sale of the business of the entity in accordance with Articles 22 and 24 of Regulation (EU) No 806/2014 of 15 July 2014, prior to the write-down and conversion of the equity instruments that determine the absorption of the losses necessary to achieve the resolution objectives.

Fourth. The SRB, in compliance with Article 20 of Regulation (EU) No 806/2014 of 15 July 2014, prior to adopting its decision on the resolution scheme to be implemented, received the valuation carried out by an independent expert, for the purposes of the aforementioned provision.

From the aforementioned valuation, economic values result of negative two billion euros (2,000) in the central scenario and negative eight billion two hundred million (8,200) euros in the most stressed scenario.

The valuation, which has a provisional character, in accordance with Article 20.10 of Regulation (EU) No 806/2014 of 15 July 2014, has informed the SRB's decision on the adoption of the sale of business instrument included in the resolution scheme, as well as the decision on the write-down and/or conversion of the shares and other equity instruments of Banco Popular.

Fifth. The FROB, in compliance with Articles 18.9 and 29 of Regulation (EU) No 806/2014 of 15 July 2014, must proceed to adopt all measures that, in the exercise of the competences attributed to it in its capacity as Resolution Authority in accordance with Article 2.1(d) of Law 11/2015, allow for the proper application of the resolution scheme, thereby complying with the principles and objectives of the resolution procedure.

Sixth. On 6 June of the current year, the entity communicated to the European Central Bank, in accordance with Article 21.4 of Law 11/2015, that the condition of unviability exists in it.

Seventh. Currently, the share capital of Banco Popular amounts to two billion ninety-eight million four hundred twenty-nine thousand forty-six euros (2,098,429,046.00€), represented by four billion one hundred ninety-six million eight hundred fifty-eight thousand ninety-two (4,196,858,092) registered shares, fully subscribed and paid up with a nominal value of fifty euro cents (0.50€) each, fully subscribed and paid up, and belonging to a single class and series.

Legal Grounds First. On the competence of the Single Resolution Board and the FROB.–Law 11/2015 of 18 June on the recovery and resolution of credit institutions and investment firms aims to regulate the processes of early intervention and resolution of credit institutions and investment firms established in Spain, with the purpose of protecting the stability of the financial system by minimizing the use of public resources. In accordance with paragraph 1 of the Additional Provision Fourth of the Law, it shall be applied in a manner compatible with the provisions of Regulation (EU) No 806/2014 of 15 July 2014, in particular regarding the functions of the European authorities within the framework of the Single Resolution Mechanism, and the duty of collaboration of national authorities with European authorities for the correct execution in Spain of the decisions adopted by the European authorities in the exercise of their competences.

Within the framework of the distribution of competences that Regulation (EU) No 806/2014 of 15 July 2014 establishes between the SRB and national resolution authorities, Article 7.2 establishes that the SRB shall be responsible for the adoption of all decisions related to the resolution for the entities referred to in Article 2 thereof that do not form part of a group and groups considered significant in accordance with Article 6.4 of Regulation (EU) No 1024/2013; or with respect to which the ECB has decided in accordance with Article 6, paragraph 5, letter b), of Regulation (EU) No 1024/2013, to exercise itself all relevant powers; and other cross-border groups. On the other hand, and within the framework of action of the SRB, it corresponds to national resolution authorities to apply the resolution measures decided by the SRB through compliance with the instructions received regarding this matter. In view of the foregoing, since Banco Popular is a credit institution established in a Member State participating in the Single Resolution Mechanism, therefore falling under the case provided for in Article 2(a) of Regulation (EU) No 806/2014 of 15 July 2014 and having the status of a significant entity in accordance with Article 6(4) of Regulation (EU) No 1024/2013, the SRB is the responsible authority, under Article 7.2(a) of the Resolution Mechanism, for the adoption of all decisions relating to the resolution of the entity, including the competence to declare the resolution of the entity and to adopt the relevant resolution scheme in which the resolution measures to be applied to the entity will be contained.

The FROB, in its capacity as resolution authority, and in accordance with Article 18.9 and 29 of Regulation (EU) No 806/2014 of 15 July 2014, shall implement the resolution scheme agreed by the SRB in compliance with the instructions issued by the latter. For the application of the instruments and measures determined by the SRB, the FROB will exercise the powers granted to it by Law 11/2015 of 18 June, in accordance with its Article 62.

In view of the above, the FROB, through this Resolution, proceeds to implement the resolution measures agreed by the SRB in the resolution scheme referenced in the Factual Background Third of this Resolution.

Second. The resolution measures and instruments provided for in the Resolution Scheme SRB/EES/2017/08.–The resolution scheme adopted by the SRB establishes that the resolution instrument to be applied to the entity is the sale of its business in accordance with Article 24 of Regulation (EU) No 806/2014 of 15 July, through the transfer of shares to a purchaser. Prior to the application of the aforementioned resolution instrument, the SRB has established that, in application of Article 21 of Regulation (EU) No 806/2014 of 15 July, the write-down and conversion of the relevant equity instruments shall be carried out in the terms provided for in the aforementioned article.

To this end, the SRB has given the FROB the appropriate instructions for the implementation of the resolution measures and instruments in accordance with Law 11/2015 of 18 June, developed by Royal Decree 1012/2015 of 6 November (Royal Decree 1012/2015). The cited norms transpose into the Spanish legal order Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012 of the European Parliament and of the Council.

The resolution scheme adopted by the SRB indicates the reasons for the adoption of the resolution instrument consisting of the sale of the business of the entity, as well as the justification of the measures relating to the write-down and conversion of the equity instruments, which order to be exercised prior to the transfer of the shares.

With the resolution scheme adopted by the SRB, it is intended to comply with the principles and objectives that must inform any resolution process. Specifically, and first of all, the new regulatory framework starts from the fundamental idea that shareholders and creditors of the entity in resolution must be the first to bear losses in accordance with the order of priority established in insolvency legislation, with the legally established exceptions. This is established by both Article 15 of Regulation (EU) No 806/2014 of 15 July, as well as Art. 4 of Law 11/2015, and Article 34 of Directive 2014/59/EU, which is a reference for the SRB to the extent that the aforementioned Regulation refers to said Directive. The aim is to minimize the effects of the resolution of an entity on taxpayers' resources and to ensure an appropriate allocation of resolution costs between shareholders and creditors.

Secondly, as also established by the aforementioned articles, the resolution of an entity must in all cases respect the principle that no shareholder or creditor shall bear losses greater than those they would have borne if the entity were liquidated within the framework of an insolvency procedure.

In compliance with the foregoing, the law establishes a clear order of priority of claims within the framework of resolution, establishing that it must be guaranteed that holders of ordinary shares, holders of Additional Tier 1 and Tier 2 capital instruments absorb the corresponding losses before any other resolution measure is adopted.

In accordance with the principles exposed, in compliance with what is established by the SRB in the resolution scheme, and in application of Articles 38 and 39 of Law 11/2015 of 18 June, and Articles 37.2, 59 and 60 of Directive 2014/59/EU, the FROB must carry out the write-down or conversion of the equity instruments in combination, in this case, with the resolution instrument consisting of the sale of the entity.

Thus, the holders of Banco Popular shares, the holders of Additional Tier 1 capital instruments, and the holders of Tier 2 capital instruments must assume the losses generated in the entity, as demonstrated by both the negative economic valuation of the entity and the price offered in the framework of the implementation of the entity's sale instrument, through a transparent, competitive, and non-discriminatory process.

The economic valuation, as well as the offer presented in the competitive process that constitutes the instrument to ensure the adequate orderly resolution of the entity, reveals the existence of losses that must be absorbed, with shareholders losing their participation in the share capital first up to the limit of their capacity, and their contributions remaining as unavailable voluntary reserves to be applied in the future to the absorption of estimated negative results, recognized by the valuation. Likewise, the offer presented in the process, which constitutes the most appropriate instrument to ensure the adequate orderly resolution of the entity, requires the need to write down and convert the different equity instruments.

On the other hand, regarding the second principle, it should be noted that, in accordance with the information contained in the economic valuation of the entity, shareholders and creditors whose equity instruments will be converted and/or written down will not bear greater losses with such measures than they would have had to bear within the framework of an insolvency procedure. In this sense, in accordance with Article 20.16 of Regulation (EU) No 806/2014 of 15 July, the estimation of the treatment referenced in the previous paragraph must be confirmed by the SRB through a specific valuation carried out by an independent expert whose object will be to confirm whether shareholders and creditors would have received better treatment if the entity had been subject to an insolvency procedure. The aforementioned valuation must, once the resolution measures subject of this decision are implemented, determine whether shareholders and creditors must be compensated for the difference between the losses borne and those they would have incurred if the entity had been liquidated within the framework of an insolvency procedure, and they will have the right to obtain payment of said difference in treatment.

Third. Execution of the power to write down and convert equity instruments.

1. Identification of the Equity Instruments affected by the exercise of the power to write down and convert. The share capital of Banco Popular is currently estimated at the sum of two billion ninety-eight million four hundred twenty-nine thousand forty-six euros (2,098,429,046€), represented by four billion one hundred ninety-six million eight hundred fifty-eight thousand ninety-two (4,196,858,092) shares, of fifty euro cents (0.50€) nominal value each, represented by book entries, fully paid up. All shares representing the share capital of Banco Popular belong to the same class and series, enjoy full and identical political and economic rights, and there are no privileged shares.

These shares are called to be written down first, as provided for in Article 39.1(a) of Law 11/2015 of 18 June.

Next, the power of conversion and subsequent write-down will fall on the Additional Tier 1 capital instruments, which are the following:

Issuer ISIN Amount in circulation Number of instruments Banco Popular Español, S.A. . . . . . . . . . . . . . . . . . XS0979444402 499,985,000€ 5,000 Banco Popular Español, S.A. . . . . . . . . . . . . . . . . . XS1189104356 749,988,000€ 3,750 Popular Capital, S.A. . . . . . . . . . . . . . . . . . . . . . . . . DE0009190702 64,695,000€ 64,695 Popular Capital, S.A. . . . . . . . . . . . . . . . . . . . . . . . . DE000A0BDW10 19,115,000€ 19,115 Popular Capital, S.A. . . . . . . . . . . . . . . . . . . . . . . . . XS0288613119 5,400,000€ 108 Pastor Participaciones Preferentes, S.A.U. . . . . . . . XS0225590362 7,359,000€ 7,359

Finally, it is necessary to convert the nominal amount of Tier 2 capital instruments, as this is necessary to achieve the resolution objectives. Thus, the following issuances will be affected by the exercise of this power:

Issuer ISIN Amount in circulation Number of instruments Banco Popular Español, S.A. . . . . . . . . . . . . . . . . . ES0213790001 99,700,000€ 1,994 Banco Popular Español, S.A. . . . . . . . . . . . . . . . . . ES0213790019 200,000,000€ 200,000 Banco Popular Español, S.A. . . . . . . . . . . . . . . . . . ES0213790027 250,000,000€ 250,000 BPE Financiaciones, S.A. . . . . . . . . . . . . . . . . . . . . XS0550098569 91,700,000€ 1,834

Issuer Identificative (unlisted debt) Amount in circulation (equivalent in euros of the outstanding balance) Number of instruments Total Bankshares Corporation . . . . . . Subordinated debt Total Bank 1. 10,978,957€ 12,000 Total Bankshares Corporation . . . . . . Subordinated debt Total Bank 2. 10,978,957€ 12,000 Total Bankshares Corporation . . . . . . Subordinated debt Total Bank 3. 10,978,957€ 12,000 Total Bankshares Corporation . . . . . . Subordinated debt Total Bank 4. 10,978,957€ 12,000

It should be noted that the "Subordinated debt Total Bank" bond series are unlisted issuances denominated in US dollars and the outstanding balances collected in the table above are expressed in euros at the exchange rate in force on the date of submission of the information by the entity. However, for their conversion into shares of one euro nominal, the official exchange rate published by the Bank of Spain corresponding to the close prior to the approval of this agreement (1.1249 euros per share) will be applied. That is, each 1,000 dollars of nominal of these titles would be converted into 888 shares of one euro nominal each.

2. Actions necessary for the absorption of losses as a consequence of the exercise of the power to write down and convert. The exercise by the FROB of the power to write down and convert equity instruments is adjusted to the instructions given by the SRB in the Resolution Scheme and respects the regulation provided for in Article 47 and paragraphs 1 to 3 of Article 48 of Law 11/2015 of 18 June, as well as in Article 21 of Regulation (EU) No 806/2014 of 15 July, and Articles 59 and 60 of Directive 2014/59/EU, which is a reference for the aforementioned Regulation.

Specifically, the following actions must be carried out: a) Reduction of share capital to zero euros (0€) through the write-down of shares currently in circulation with the aim of constituting a voluntary reserve of an unavailable character. b) Simultaneously, the execution of the increase in share capital for the conversion of all Additional Tier 1 capital instruments, amounting to one billion three hundred forty-six million five hundred forty-two thousand euros (1,346,542,000 €), divided into shares of 1 euro nominal value. Modification of the bylaws. c) Reduction of share capital to zero euros (0 €) through the write-down of the shares subscribed by the conversion of the Additional Tier 1 capital instruments agreed in the previous section, and with the aim of constituting a voluntary reserve of an unavailable character. d) Simultaneous increase in capital for the conversion of all Tier 2 capital instruments into new shares amounting to six hundred eighty-four million twenty-four thousand euros (684,024,000€), of one euro (1€) nominal value. Modification of the bylaws.

a) Reduction of share capital to zero euros (0€) through the write-down of shares currently in circulation with the aim of constituting a voluntary reserve of an unavailable character.

Since the economic valuation of Banco Popular has resulted negative, and corroborated by the price resulting from the sale process of the entity as a resolution instrument, it is imposed as necessary the adoption, as the first agreement, of the reduction of the share capital of the entity to zero through the write-down of shares currently in circulation.

The agreement to reduce the share capital to zero adopted by the FROB in execution of the resolution scheme has the character of an administrative act as established by Articles 35.1 and 64.1(d) of Law 11/2015 of 18 June. Thus, and according to Art. 65.1 of the Law, the agreement to reduce to zero euros is an agreement immediately effective from its adoption without the need to give compliance...