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Spain’s Weakened Banks Shackle Builders’ Drive for Growth Abroad

Spain’s Weakened Banks Shackle Builders’ Drive for Growth Abroad
Lending to Spain’s building industry has already slumped 40 percent from 2007, according to Bank of Spain data. Photographer: Angel Navarrete/Bloomberg

Spanish builders find themselves increasingly dependent on foreign banks as they seek growth abroad to weather the worst property slump on record.

“We are having more difficulties with access to credit,” said Susana Monje, chief executive officer of Grupo Essentium, a construction firm based near Madrid that turned to Germany’s Deutsche Bank AG for backing to win a contract in India this year. “There’s a label for Spanish companies and if you have that label, then you have it more difficult.”

Spanish builders such as Essentium and Actividades de Construccion & Servicios SA are paying the price for the frail state of the country’s banking system as they seek to tap growth abroad to compensate for a collapsed market at home. While helping fuel a housing boom before the bubble burst in 2008, lenders have since become reluctant to support the construction industry’s growth ambitions, instead focusing on reducing domestic real estate losses and cutting lending risks.

The country is set to receive about 40 billion euros ($52 billion) in bailout funds as soon as tomorrow after earlier this year sealing an agreement for as much as 100 billion euros of European aid to stabilize its banking system. Under the terms, Bankia group and two other nationalized lenders, whose combined assets amount to almost a fifth of Spain’s banking industry, will have to cut assets by more than 60 percent by 2017.

‘Significant Barrier’

Lending to Spain’s building industry has already slumped 40 percent from a 2007, according to Bank of Spain data. Loans for construction as a proportion of gross domestic product dropped to about 9 percent from 15 percent in that period.

“It’s true that financing conditions have got tougher,” Jose Manuel Loureda, general director of international business at Sacyr Vallehermoso SA, a construction company based in Madrid, said in a telephone interview. “It has become a significant barrier to overcome.”

Spanish bad loans may increase further as the economy continues to shrink in 2013, the Bank of Spain said on Nov. 5. Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s largest lenders, were downgraded two levels to BBB and BBB-, respectively, by Standard & Poor’s on Oct. 16. The firm also cut the ratings of nine other banks and placed six on credit watch negative.

Tougher Competition

Builders are also struggling to regain investor confidence in their balance sheets. ACS has been forced to disclose more financial information to win foreign orders than in the past, spokesman Juan Jose Diaz said. Spain’s biggest construction company started to “bid pretty much anywhere” as customers grew more cautious and competition toughened, he said.

While Essentium’s infrastructure construction unit in July won a 30-month contract worth 26 million euros to build a 67-kilometer (42-mile) section of railroad in the Indian state of Uttar Pradesh, it had to first line up a counter-guarantee from Deutsche Bank after the contractor declined to accept its backing from a Spanish lender, said Monje.

“We have only encountered this situation once, it’s not wide-spread and we hope this doesn’t get any worse,” she said. “The issue of guarantees is one of the most decisive factors for Spanish companies to be successful when expanding abroad. We could attack the market much more for railroad projects if we had more support in terms of guarantees.”

‘Negative News’

Spain is relying on the ability of its companies to build their businesses abroad, with the economy mired in its second recession since 2009 and more than a quarter of the working population unemployed. GDP may drop 1.5 percent this year and next, before increasing 0.5 percent in 2014, a Bloomberg News survey shows. By comparison, the euro-area economy is seen returning to growth next year, a separate survey shows.

Sacyr, whose international business accounts for about 40 percent of revenue, up from 36 percent a year ago, is seeking to further expand abroad after winning contracts in countries including Panama and Angola in the third quarter, said Loureda.

At Essentium, Monje said the lack of funding at home has forced the builder to “find resources where we didn’t look before,” such as consortiums with local partners.

“All the negative news on Spain is having a negative impact on Spanish companies,” she said. “The construction sector needs to reinvent itself or die.”

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