Spain’s $185 Billion Restructuring Test for Rajoy Cleanup

Photographer: Angel Navarrete/Bloomberg

Pedestrians cross a street in Madrid, Spain. With the five-year economic slump showing little sign of easing, businesses and consumers are approaching banks to negotiate lower interest rates and longer maturities on their borrowing. Close

Pedestrians cross a street in Madrid, Spain. With the five-year economic slump showing... Read More

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Photographer: Angel Navarrete/Bloomberg

Pedestrians cross a street in Madrid, Spain. With the five-year economic slump showing little sign of easing, businesses and consumers are approaching banks to negotiate lower interest rates and longer maturities on their borrowing.

A rush by recession-hit Spanish businesses and consumers to refinance their loans will test Prime Minister Mariano Rajoy’s pledge of a “definitive” cleanup of the nation’s crisis-hit banks.

Spain’s banks have restructured about 140 billion euros ($185 billion) of loans outside the country’s crippled real estate industry, according to Oliver Wyman, a consulting firm that did a stress test of Spanish lenders. Bad loans surged to a record 11.2 percent of total lending, the Bank of Spain said yesterday.

“We are working with factories, restaurants, any kind of business,” Agusti Bou, who works on restructuring credit at Jausas, a Barcelona-based law firm, said in a phone interview. “There’s going to be a growing default problem because the huge issue in Spain is not the public debt, it’s the private.”

Spain has ordered banks to recognize 84 billion euros of losses to purge their balance sheets of real estate as Rajoy recapitalizes at least four failed lenders with about 40 billion euros of European bailout funds. The strategy focuses on soured property assets and may neglect impending losses on loans to firms and homeowners as the economy shrinks, analysts say.

While small and medium-sized businesses have restructured as much as 21 percent of the 230 billion euros they owe, according to Oliver Wyman, total non-performing loans in the country grew by 7.8 billion euros to 190 billion euros in October, the Bank of Spain said. The nation’s bad-loan ratio will jump to 14.5 percent of all lending, assuming that 30 percent of refinanced credit turns sour within a year, said Daragh Quinn, a banking analyst at Nomura Holdings Inc. (8604) in Madrid.

Photographer: Angel Navarrete/Bloomberg

Customers gather around a broken automated teller machine outside a Banco Bilbao Vizcaya Argentaria SA branch in Madrid, Spai. BBVA, Spain’s second-biggest bank, said it’s got lending risks under control. Close

Customers gather around a broken automated teller machine outside a Banco Bilbao... Read More

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Photographer: Angel Navarrete/Bloomberg

Customers gather around a broken automated teller machine outside a Banco Bilbao Vizcaya Argentaria SA branch in Madrid, Spai. BBVA, Spain’s second-biggest bank, said it’s got lending risks under control.

‘Decisive’ Steps

Rajoy, 57, said two days ago that the measures Spain has taken to strengthen banks meant 2012 would be remembered as the year it laid the ground for recovery.

“The definitive cleanup of our financial system will contribute decisively to restoring confidence in the Spanish economy,” he told members of his party in a speech in Toledo in central Spain.

With the five-year economic slump showing little sign of easing, businesses and consumers are approaching banks to negotiate lower interest rates and longer maturities on their borrowing. The economy may shrink by 1.5 percent both this year and in 2013, according to the average estimate in a Bloomberg survey of 37 economists. Unemployment, which stands at 26 percent, the highest in the European Union, will reach almost 27 percent next year, the Organization for Economic Cooperation and Development forecast on Nov. 27.

Troubled Banks

Larger companies have restructured as much as 29 billion euros of loans, or 11 percent of total borrowing, and homeowners 9 percent of 600 billion euros in mortgages, according to Oliver Wyman data.

“Nobody should be invested in the domestic-focused banks in Spain,” Dirk Becker, head of banking research at Kepler Capital Markets, said in an interview with Bloomberg Television in Frankfurt yesterday.

Banco de Sabadell SA, Bankinter SA (BKT), Banco Popular Espanol SA (POP) and CaixaBank (CABK) are rated as four of the five “top under performers” among European banks covered by Kepler due to their exposure to the domestic market, Becker said.

Bankia and Banco Popular rank among the bottom 10 lenders in the 46-member Stoxx 600 Banking Index in terms of the ratio of their share price to book value. The list also includes five Italian banks, National Bank of Greece SA, France’s Credit Agricole SA (ACA) and Commerzbank AG of Germany.

Ski Resort

“You are basically depending on the economy performing better and unemployment starting to fall before you can have any comfort that further defaults can be avoided,” Benjie Creelan- Sandford, a banking analyst at Macquarie Bank Ltd., said in a telephone interview from London.

Bou, the lawyer at Jausas, said he advised Boi Taull, a ski resort in the Pyrenees mountains in northern Spain, to renegotiate about 45 million euros of debt this year after the company sought protection from creditors.

Lenders agreed to extend repayment to 15 years from six years and to reduce interest rates to an annual 0.75 percentage points above benchmark European lending rates, or Euribor, from as much as 3 percentage points, according to Bou. An official for the resort declined to comment by telephone yesterday.

While the deal meant Boi Taull survived, the restructuring may also help banks unwind the provisions they had set aside for the bad debt and avoid selling off real estate assets that may have been hard to value, said Bou.

“If there’s a chance of refinancing, banks will explore all avenues to achieve it,” he said. “It’s less damaging than having loan repayments frozen for years if the debtor applies for creditor protection.”

Firms Collapse

Spain was the European country with the greatest number of firms seeking protection from creditors since the start of the 2008 global financial crisis, according to Spanish credit rating company Axesor. The number jumped more than 280 percent from 2008 to the end of 2011, outstripping insolvencies in Greece, Ireland and Portugal, it said in a July report.

Spanish companies processed through bankruptcy proceedings climbed an annual 23 percent to 6,142 in the third quarter, according to the National Statistics Institute in Madrid.

Hair Transplant

Renegotiating the terms of loans may be a good strategy for both banks and companies, said Stuart Percival, a lawyer at the Madrid branch of law firm Clifford Chance.

“I would like to think that once the restructuring has been done, that should allow the companies to move on,” he said in a phone interview. “The point of the process was to allow companies to breathe.”

The danger is that some Spanish lenders may be using refinancing as a tool to delay defaults that are inevitable, said Mikel Echavarren, chief executive officer of Irea, a Madrid-based firm advising clients on loan restructuring.

“All this results in brutal contraction of income for all companies and sectors, with the exception of those that rely on exports,” said Echavarren in a phone interview. “We are refinancing companies ranging from real estate to transport -- we even refinanced a hair transplant clinic.”

‘Under Control’

Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s second-biggest bank, said it’s got lending risks under control. The firm is focused on ensuring that more loans awarded to smaller firms don’t turn sour, Chief Operating Officer Angel Cano told analysts in a conference call in October.

BBVA’s non-performing loan ratio for business lending climbed to 8.2 percent of total loans in September from 5.7 percent at the start of the year, it said in its third-quarter earnings statement.

The Bankia group, which has received almost 18 billion euros of financial aid, is setting aside 8.1 billion euros in provisions this year to cover potential defaults on non-real estate loans, it said last month. Banco Popular said in October it would write off 3.2 billion euros of non-property loans by next year as it cleans up its balance sheet.

Government decrees in February and May have forced Spain’s banks to recognize losses on their real estate assets. Based on Oliver Wyman data, they’ve also restructured at least 108 billion euros in loans to real estate companies, on top of the 140 billion euros of refinancing for other businesses and Spanish consumers.

Avoiding Losses

Bankia and the three other Spanish lenders bailed out by the European Union must transfer their real estate to a so- called bad bank, known as Sareb.

Jesus Maria Ruiz de Arriaga, a partner in law firm Arriaga Asociados specializing in refinancing, said he helped an electronics producer restructure a loan of about 10 million euros in 2011. The terms agreed with two banks, which he declined to identify, included a two-year waiver on repayment of capital.

“The company will have to renegotiate again next year because the economic situation has not improved and its issues are not resolved,” he said in a phone interview from Madrid. “Part of my job is to explain to my customers that it’s the banks that are weak in these situations, not them. The banks are desperate to avoid more losses.”

To contact the reporter on this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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