Spain’s ten-year building boom has ended with a crash – privately owned companies are seeking insolvency although their listed peers are staying afloat for the moment. Insolvency and restructuring lawyers are finding themselves in the front line of the action for the first time in years.
Los últimos años del boom inmobiliario han concluido con la caída de empresas privadas insolventes, con la excepción de las empresas cotizadas que, por ahora, permanecen a flote. Esto, junto con la lamentable coincidencia de la crisis sub-prime, hace que se cumpla el ya predecible final del boom inmobiliario español.
Después de meses de discursos políticos donde se restaba importancia a la crisis sub-prime en los EE.UU., empresarios y banqueros admiten ya la situación de recesión - con casi un anuncio diario de compañías del sector que buscan una refinanciación para su deuda o que simplemente se declaran insolventes.
Sin duda, son los abogados especialistas en insolvencia y reestructuración los que más se precisan y por primera vez conducen la evolución de la economía.
It was Miguel Blesa, President of Spain’s leading savings bank, Caja Madrid, who finally admitted that the Spanish real estate sector, and its financing banks, are facing a crisis. After months of talking down the possible fallout from the US sub-prime crisis in Spain by politicians, business leaders and bankers alike, the almost daily announcement of more building sector companies struggling to refinance their debt or initiating insolvency procedures finally persuaded Blesa that the widespread bravado of no pasa nada (nothing is going to happen) was no longer tenable.
The official figures for the state of the Spanish property market released by the National Statistics Institute in January said it all. Completed domestic property sales had dropped, year on year, by 27%, and the total credit advanced to buyers had fallen by almost the same amount, to €13.4bn. 500,000 new homes remain unsold. During the building frenzy, the sector was consuming half of all the cement in Europe while employing 13% of the Spanish workforce.
The impact on small and medium-sized property developers has been almost immediate. Unable to meet interest and capital repayments on their finance loans it has meant that many have sought the protection of insolvency status in the courts in order to safeguard their assets.
This follows what some see as the unhappy coincidence of sub-prime with the widely expected end of Spain´s building boom.
“The truth is that this crisis was going to happen, sub-prime or not,” suggests one Madrid lawyer. “The Bank of Spain could see a disaster looming last summer but its calls for caution amongst lenders were ignored. House prices continued to spiral upwards, financed by banks desperate not to lose market share to competitors.” Despite international commendation for the way the Bank of Spain has regulated against sub-prime risk, the unforeseen global financial crisis could not have come at a worse time.
Private sector in turmoil
It was a listed company, Astroc, that last June caused the first sense of mistrust in the sector after admitting debt servicing problems and some “grey” dealing in assets between the company and its President, Enrique Bañuelos.
Once the credit squeeze began to bite, it was a private Valencian promoter, Llanera that was the first to fall. It filed for insolvency in October with debts of €700m. At the time of writing, nine other medium-size private companies (see table) have now filed for concurso voluntario de acreedores, previously known as suspensión de pagos.
The biggest of these, Cosmani Inmobiliaria is a typical insolvency. It is seeking protection from its creditors while trying to service a €350m debt mountain against a €1.6bn asset base.
Grupo Lábaro, which has important operations in Poland, is the latest to file in a Madrid court. It is carrying €700m of debt, of which €202m is due for repayment this year. It has been desperately trying to sell off some of its €2bn land portfolio to meet €40m in unpaid bills. Alongside legal advisers Clifford Chance it is also negotiating with various investment funds to take stakes in the company.
Many others are struggling to stay afloat. For instance, Catalán promoter Fbex has to refinance €600m of its €1,300m debt related to land purchases for residential building programmes that cannot now start for lack of potential buyers. Selling off large land banks is not easy. Values have plummeted, not helped, some suggest, by last year’s changes to the land-law – Ley de suelo – that requires 30% of building land to be used for less profitable social housing – as well as the proposed compulsory purchase of coastal land by the government for environmental redevelopment.
Where lawyers can assist?
Following legislative changes the expectation was that Spanish businesses experiencing financial difficulties would increasingly seek insolvency proceedings in the courts.
The reality, lawyers say, has been quite different.
Insolvency proceedings are extremely time consuming and businesses are now choosing to work directly with creditors.
“These are days for restructuring and not insolvency,” says Antonio Fernandez and Juan Verdugo at Garrigues.
Their firm is still advising on the first insolvency arising under the new law, a process which started in 2004 and is not yet completed.
He believes that businesses need to explore all options before entering into insolvency proceedings - maintaining their credibility and reputation is always a key concern.
So what makes a good insolvency lawyer? Businesses report that key requisites include being commercially aware, able to move quickly and respect deadlines.
Lawyers should not only be able to identify problems but also adopt a common sense, practical approach to dealing with them.
An ability to communicate well and build up relationships and good negotiating skills are useful, especially when a client is in a weaker position than other creditors.
On the other hand restructuring specialists know how to identify and sell off non-core assets in a failing company and how to effect dramatic reductions in staff numbers before trade unions have a chance to act.
Refinancing of corporate debt to get interest rates down and capital repayments deferred is another core skill.
Once these actions are achieved the specialists can turn their attention to medium-term remedies to get the company back on its feet, such as outsourcing support operations like IP and payroll, and revitalising the management.
Some law firms have these specialists already working together in multidisciplinary groups.
Listed companies fight for survival
The lawyers advising the listed property companies, which have lost 62% of their capitalisation in a year, have been more successful in refinancing their debt. The top 10 have €38bn debt (see table), equivalent to 3.5% of Spanish GDP. €6bn is due for repayment this year and most have had to start restructuring their operations through a plan de viabilidad.
Some were previously owned by banks; others began as residential developers and then, with access to very cheap credit, started buying companies bigger than themselves. As one real estate lawyer explained to Iberian Lawyer: “They believed the market would continue growing and so interest and capital repayments were never going to be a challenge.”
Colonial, which had become Spain’s second biggest property group but with all its assets in the commercial sector, has also had to sell off real estate to stay afloat. It has to pay off €150m principal and €450m interest in 2008, when its total income from its rentals in 2007 was only €313m. About a third of its French subsidiary SFL, and its 15% stake in infrastructure and services specialist FCC are now up for sale.
Habitat, which specialises in developing urban plots, and has been on the edge of insolvency for three months, finally refinanced its €1.6bn loan even though its debt to asset ratio is a staggering 95%. The banks have insisted, however, that Habitat reduces its staff considerably and does not make any further acquisitions for the next six years which leaves it with no other option but to sell off assets. It has also to deal with its disgruntled minority shareholders, including Emilio Cuatrecasas. They have mandated Rodés & Sala to represent their grievances in court.
Martinsa-Fadesa has €5bn debt, 40% of its net asset value, following the 2007 acquisition of Fadesa. It will start selling off some of its overseas projects – and it has already disposed of 50% of its Moroccan subsidiary.
International property investments by the sector are bound to slow as companies like Martinsa-Fadesa reassess their position. Some are pulling out of the CEE already.
This may impact on those Spanish law firms like Garrigues and Uría Menéndez that have opened offices there recently, particularly to service these real estate companies.
Bargains but where are the buyers?
While companies may now appear inexpensive to international buyers, it seems some are waiting to see how low the market goes. Some equity buyers, like Inditex’s Amancio Ortega and his Pontegadea property vehicle, will undoubtedly be looking for bargains. Others, like Grupo Ballester, New Winds Group and the de los Santos family who are sitting on cash piles having sold out to the likes of Colonial, may be keen to get back into the sector at discount prices.
There are also so-called “vulture funds” in play. They never reveal their clients and only buy debt-distressed companies on the verge of collapse. Terra Catalyst for instance is raising €660m solely to acquire assets in anticipation of a return in company capitalisation in the medium term. Listed Aisa would be a typical target. It is carrying €424m of debt against a market capitalisation of around €70m. It has sold offices in Barcelona and Madrid and is desperately looking for a “white knight”.
It remains to be seen if sovereign funds take another look at the sector. Dubai fund ICD walked away after what one lawyer describes as four tortuous months of negotiations to try and acquire Colonial. Despite Colonial’s share price falling through the floor, a deal could not be struck as Colonial’s banks saw they had too much to lose. The failure may now have frightened off other similar funds.
Legal work for all
Law firms consulted by Iberian Lawyer say that the challenge now is to match the resources of their insolvency and restructuring teams with the cases as they arise. Accepting an instruction to advise a case today may mean missing the bigger instruction tomorrow.
In a voluntary insolvency, like all to date, it is the company that appoints the lawyers, paying in advance their fee estimate. In a forced insolvency, which would be likely if a listed company has difficulty, the creditors would take the lead on appointing lawyers, although the company can still have its own legal representatives. The mercantile judge is responsible for appointing the three receivers - an auditor, an economist and a lawyer. While the auditor often comes from one of the bigger accountancy firms, the other two are usually individuals with their own practice. Few large law firms like to work as receivers, Roca Junyent is one of only a few exceptions.
The bigger law firms tend to be close to the banks and this produces significant conflict problems, even more so for the international law firms. Small companies tend to choose insolvency boutiques and smaller law firms.
Garrigues is probably the best placed, having increased its insolvency practice numbers by 40% in 2007, under the leadership of Antonio Fernández. They have been closely involved in most of the recent major restructurings including Detinsa, Habitat and Urconsa as well as major workout and insolvencies such as Jale, Llanera, UDSL and Acis, among others. Cuatrecasas has already been in action by advising on the Llanera insolvency and Habitat, with its lawyers in legal action against their own President Emilio Cuatrecasas, and other minority shareholders. The strong relations which Uría Menéndez enjoys with the banks makes them well-placed to advise failing corporates wishing to give their creditors comfort in the restructuring or insolvency process.
While all major firms are likely to pick up good work if the listed companies start to fail, there is still currently plenty of work for the smaller firms. Some law firms have specialised in advising smaller creditors by offering their services through a creditors’ club – club de acreedores.
One of the best known is Madrid-based IURE Abogados. It has set up clubs for the voluntary insolvencies of SEOP, Contsa and Llanera. Smaller creditors stand some chance of recovering their monies, which would otherwise end up in the hands of the major creditors. Fees are reasonable: a minimum of €1,000 and 1% of outstanding debt from €200,000 upwards.
In insolvency cases, the debtor pays all costs including those of the lawyers, who should be paid up front, and the procuradores – mandatory interfaces between the court and the parties. So restructuring and insolvency teams are about to become much more appreciated by their managing partners. Not before time they would say.
Contagion
For the moment the rest of the IBEX-35 seems unaffected by the dramas unfolding in the real estate market. While the banks may have to take a loss on loans in this sector, their risk is well balanced elsewhere. The energy companies are boosted by high oil prices and the constructors have diversified sufficiently to have enough oxygen to keep going, at least in the medium term. However all will start to lose ground if consumer confidence falls. Recession in Spain certainly cannot be discounted. Law firms who still insist on no pasa nada, some lawyers say, could be in for a rude shock.
For whom the bell tolls
There can be no doubt that further builders in the private sector will file for insolvency, and many of them will have to be liquidated as the residential property market has collapsed. All eyes are on the listed companies. To date they are just about able to keep going since their loans are so huge no bank wants to call it a day and recover what it can from liquidation. But the judgement day seems to be approaching when their loans, which may now be viewed as sub-prime in nature as their business case was never strong, will have to be written down or even off. If that happens, the big names in insolvency will then have their finest hour.
|
