Martinsa Seeking Relief on $9.3 Billion Burden: Distressed Debt

Martinsa-Fadesa SA, the Spanish property developer with 6.7 billion euros ($9.3 billion) of debt that sought bankruptcy protection in 2008, is in talks with lenders on a maneuver that would help it avoid insolvency.

The builder of homes, malls and golf courses wants creditors to convert 115 million euros of loans into a type of obligation that would count as equity rather than debt on its balance sheet, according to a person familiar with the matter, who asked not to be identified because they’re not authorized to speak about it. That would keep the developer from violating Spanish law and help it avoid being dissolved.

Martinsa collapsed when Spain’s real-estate boom ended and the country plunged into the worst economic slump in its democratic history. The developer posted its sixth annual loss last year and didn’t have enough funds to make a scheduled payment of 39 million euros to lenders in December. It has to find more than 500 million euros within nine months to meet the next deadline of a 2011 creditor agreement, or face liquidation.

“Martinsa’s future looks very complicated,” said Francisco Salvador, a strategist at broker FGA/MG Valores in Madrid. “It looks like the company needs to conduct a brutal clean-up of its balance sheet in order to survive.”

Negative Equity

Under Spanish law, La Coruna-based Martinsa could be declared insolvent if operational losses cause assets to be worth less than liabilities.

To reduce negative equity, the company is negotiating with creditors to convert debt into participative loans, which count as equity when used to avoid liquidation, according to the person familiar with the situation. The property developer, which has 28 residential projects in Spain from the Pyrenees to the island of Fuerteventura, reported a loss of 568 million euros last year, giving it negative equity of 4.2 billion euros, compared with 3.6 billion euros in 2012, according to company filings.

An external spokesman in Madrid for Martinsa, who asked not to be identified citing company policy, declined to comment on the insolvency risks and talks with creditors.

Martinsa sought voluntary creditor protection in July 2008 after it failed to get a 150 million-euro loan to refinance debt, which had been syndicated to about 45 lenders, according to regulatory filings. It spent almost three years in creditor protection, known as concurso in Spanish bankruptcy law, before reaching an agreement with creditors in March 2011.

Annual Payments

Spanish lenders Banco Popular Espanol SA, La Caixa, now the owner of Caixabank SA, Caja Madrid, the savings bank that transferred its banking operations to Bankia SA and NCG Banco SA proposed the plan, regulatory filings show.

As part of the accord, the developer agreed to make annual debt payments for eight years and sell assets. In 2011 and 2012 it paid lenders a total of about 39 million euros, the person said.

There’s “significant uncertainty regarding the company’s ability to continue its operations, sell assets and meet annual liability payments,” Martinsa’s auditor Deloitte LLP wrote in an April report.

The company, formed from the merger of Grupo Martinsa and Fadesa Inmobiliaria SA in 2007, blamed a slow recovery in Spain’s real estate market for the missed debt payment in a Jan. 17 company statement. The developer intends to keep working to meet its obligations under the agreement and ensure its viability, according to the statement.

“The situation is very serious,” said Maria Jesus Puga, a Madrid-based lawyer at Iure Abogados advising home buyers fallen victim to Martinsa’s bankruptcy. “I doubt the company will be able to meet the terms of the agreement this year.”

Property Boom

Spain’s real estate boom lasted a decade until 2007, spurred on by cheap access to credit before an oversupply of homes and more restrictive lending standards hurt builders.

Developers built on average 675,000 homes a year from 1997 to 2006, more than France, Germany and the U.K. combined, according to a report by the research arm of Spanish savings bank Cajamar.

The nation plunged into recession when the property bubble burst, forcing the government to bail out the financial system and enforce austerity measures that prompted a surge in unemployment.

The euro-area’s fourth-biggest economy emerged from the slump in the third quarter of 2013, allowing it to sell bonds at record-low yields and encouraging foreign investors such as Bill Gates to invest in Spanish companies. Spain’s 10-year benchmark bond yield dropped to an eight-year low of 3.30 percent on March 10, down from 7.75 percent in July 2012.

‘Terrible Crisis’

“The worst of this terrible crisis is behind us,” Prime Minister Mariano Rajoy said on March 12 at an event held by Spain’s ABC newspaper. The past two years were “very hard, demanding and full of tremendous uncertainty and effort,” he said.

The payment Martinsa missed in December will be added to the next installment, bringing the total Martinsa must pay at the end of the year to about 507 million euros, the person familiar with the matter said. The developer said in a filing last month it’s working with creditors to restructure debt to make the payment and avoid liquidation.

“Martinsa may need to ask lenders to accept losses on the debt and swap debt for equity so that they take the reins and decide whether to liquidate or clean the company up,” said Salvador. “The company probably won’t be able to continue operating unless it cleans up its balance sheet.”

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