Spanish, Portuguese Banks to Abandon Infrastructure Loans as Costs Mount

Portuguese and Spanish banks may be forced to sell some of the $55 billion of loans they made to finance projects from highways to clean energy since 2006 as their own cost of funding makes holding the debt uneconomical.

Banco Espirito Santo SA put 2.7 billion euros ($3.7 billion) of low-interest loans up for sale last week, including deals for London’s Wembley Stadium and a Texan wind farm. Portugal’s biggest non-state bank earns interest as low as 60 basis points over benchmarks on the loans, according to the bid request seen by Bloomberg News. That’s not high enough to offset the average 7.25 percent yield ING Groep NV estimates the country’s lenders pay to borrow through covered bonds.

“This could be the tip of the iceberg,” said Stephen Faldo, head of Mizuho Corporate Bank Ltd.’s secondary loans syndicate in London. “The immense pressure of escalating funding costs for Iberian banks appears to be the driving force behind the large portfolio offering. We may see more Iberian banks trying to sell their non-core loan books.”

Iberian banks were Europe’s biggest lenders in project financings last year as they sought new clients from developers of infrastructure and alternate energy as far away as Montana. With concern escalating their governments can’t tackle deficits without international bailouts, banks’ financing costs have more than doubled, leaving them unable to shoulder the cost of carrying low-yielding project debt.

Discounts

“We placed 2.7 billion euros on the market,” Ricardo Salgado, Espirito Santo’s chief executive officer, said in Lisbon today after announcing 2010 results. “The amount surprised the market because of its size, but we will only execute those transactions if they offer good pricing for the bank. If the discounts are exaggerated we won’t sell a thing.”

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA were the second and fourth-most active lenders in Europe’s project-finance deals last year, according to data compiled by Bloomberg. Banks in Spain and Portugal arranged about $18 billion of the region’s deals, or more than 20 percent.

Madrid-based spokesmen for Santander and BBVA declined to comment on the banks’ strategies for managing their project- finance loan books.

Wembley, Wind Farms

A deal for Montana’s Glacier Wind Farm project by the Spanish developer NaturEner SA in 2008 for $132 million drew Espirito Santo and Banco de Sabadell SA as lenders. Banco Espirito also helped arrange a $96.8 million loan to back a wind farm project in Texas by South Trent Wind LLC and Wembley Stadium’s 342 million-pound ($544 million) loan in 2008.

Wembley Stadium, the world’s most expensive sports site costing 757 million pounds, opened a year later than planned in 2007 and at double the initial estimated cost. Its owner the Football Association expects the stadium to break even by 2014, it said in September. Financing for the project foundered after JPMorgan Chase & Co. and other lenders dropped out and had to be salvaged by the government in 2002, with backing from WestLB AG.

Spanish banks had accounted for half of the estimated 176 billion euros of losses they’ll have to absorb on their loans through writedowns and provisions, Moody’s Investors Service said last month.

‘Stretched’

Austerity measures by Europe’s governments may also tarnish the appeal of infrastructure projects. In the U.K., David Cameron’s coalition government is axing 330,000 public sector jobs to help trim a 15.3 billion-pound budget deficit.

“Certain stretched infrastructure credits are bearing the brunt of the economic difficulty in Europe,” said Tom Campbell, a London-based managing director with Blackstone Group LP. “Banks are beginning to realize the potential implications of government spending cuts.”

The bid-ask spread for loans to fund Britain’s M6 Toll Road was as wide as 65 percent of face value to 85 last week, according to European Loan Trading, a London-based broker. The 27-mile route through the nation’s Midlands was backed by nine Iberian lenders including Santander, BBVA, Espirito Santo, Banco Portugues de Investiment, Caixa Galicia and Caja Madrid, Bloomberg data show.

To contact the reporters on this story: Patricia Kuo in London at pkuo2@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net.

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Portuguese, Spanish Banks May Sell Project Loans

Andrew Harrer/Bloomberg

A deal for Montana’s Glacier Wind Farm project by the Spanish developer NaturEner SA in 2008 for $132 million drew Espirito Santo and Banco de Sabadell SA as lenders.

A deal for Montana’s Glacier Wind Farm project by the Spanish developer NaturEner SA in 2008 for $132 million drew Espirito Santo and Banco de Sabadell SA as lenders. Photographer: Andrew Harrer/Bloomberg