Wednesday, March 19, 2008

Colonial Deal Off, SEOP Seeks Creditor Protection

Investment Corporation of Dubai (ICD) said today that it was not going to buy Spanish real estate firm Colonial after it failed to reach an agreement with the company's creditors. ICD did, however, leave the door open to future negotiations.

"If there was a possibility, beyond the conditions set on March 11, to reach an agreement with Colonial, ICD would consider such a possibility and would communicate it immediately," the fund said in a statement to Spain's stock market regulator.

But Colonial's shareholders, Luis Portillo and the Nozaleda family, also in a statement to the regulator, sounded a more pessimistic note. They said ICD had not reached a deal with the creditors "(and) no expectation exists that such an agreement will be reached." They added that they continue to search for a "satisfactory solution" for Colonial and its shareholders.

Meanwhile SEOP, Spain's 13th biggest construction firm, said yesterday that was seeking creditor protection due to the fact that its own clients - many of whom are property developers - had fallen behind on payments and bank financing was harder to come by.

Spanish property companies have piled up huge debts over the last decade in a bid to make the most of a real estate boom which was fuelled by a cocktail of low eurozone interest rates and high domestic economic growth. However, many property firms are now having to renegotiate loans they took out to buy land, build houses and buy rivals to diversify into other countries or areas of real estate.

Some, like Valencia-based Llanera have already gone bust while others like Habitat and Martinsa Fadesa have had to fight an uphill battle to try to restructure their debt. But the option of selling assets to pay debts is growing harder by the day as banks cut back on mortgages and potential buyers negotiate prices down as they start to feel that the selling party is coming under pressure.

SEOP had a turnover of 434 million euros ($686 million) and a net profit of 6.5 million in 2006. In taking this step it becomes the first major supplier to have been hit by the dwindling cash flow in the sector. The company did not disclose how much its debts amount to.

Non Performing Loan Ratios

Non-performing loans held by Spanish banks and savings banks rose by about 2 billion euros ($3.16 billion) in January from December to 16.23 billion, according to data published on Monday by the Bank of Spain.

The figure was 6.5 billion euros above the total in January 2007.

In January 2008, bad debts, including those held by credit cooperatives, represented 0.955 percent of loans worth a total of 1.7 trillion euros given to individuals and companies.

Bankers and regulators expect Spain's non-performing loan ratio to as much as triple from all-time lows this year as economic growth slows and unemployment rises.

A breakdown of January's figures showed that banks lent 770 billion euros with a bad debt percentage of 0.858 percent while savings banks have lent 838.5 billion euros with a non-performing loan level of 1.032 percent.

Last year, Spain's biggest bank said its bad loan rate rose to 0.95 percent from 0.82 percent in 2006 while its leading savings bank La Caixa had a non-performing loan rate of 0.55 percent, up from 0.33 percent a year earlier.

The Bank of Spain said cooperative banks had credits of 91.5 billion euros and bad debts totalling 972 million.

Consumer credit agencies have issued loans to the tune of 58.5 billion euros by the end of January with a bad debt level of 3.1 percent.

Spain's bank and savings bank bad loan ratios are coming into line with other big European economies like Britain where the number of mortgages three or more months in arrears was 1.1 percent in 2007, according to the Council of Mortgage Lenders.

However, it is still well below countries like Greece where the central bank has said it will ask banks to bring down their non-performing loan ratio to 3.5 percent from 5.4 percent in 2006.

Update Wednesday 26 March 2008

Real estate company Cosmani joined the growing list of Spanish property firms filing for administration today. In a statement on today, Cosmani said five of its 22 units filed for creditor protection last week, around the same time as construction company SEOP had to go into adminstration because clients were not paying their bills. Cosmani's own statement is not without some significance:

"Cosmani's solvency is not in doubt as its asset value is much more than its total debt, but business has suffered because of adverse conditions in the property and financial sectors that have caused a temporary liqudity shortage,"

The group claim banks were trying to call back loans and bank guarantees, some of them ahead of maturity. Cosmani said it had 350 million euros ($545 million) of debt, almost all of it with banks, while its assets were valued at 1.6 billion euros. Net equity was 74 million euros.

Sector specialists are quoted in the press as saying they expect several property companies to file for protection under a new Spanish insolvency law which allows firms to draw up a "viability plan" including asset sales and debt renegotiations rather than going bust, which hurts banks more than agreeing to wait for repayment. Effectively Spanish property companies are are being squeezed on both sides at the moment with sales drying up while banks are trying to cut their risk exposure to the property sector, particularly in the wake of the U.S. subprime crisis.

A significant list of other property companies - from unlisted Habitat to blue-chip Colonial - are locked in talks with their banks to restructure billions of euros of debt they piled up to buy land and rivals during the decade-long housing boom. Martinsa-Fadesa is having to renegotiate its 5.1 billion euros debt while unlisted Detinsa is also trying to sell assets and change its debt structure to avoid insolvency.

Martinsa Fadesa said earlier today it expected to get approval later this week from all lenders on renegotiating terms of its 5.1 billion euro ($8 billion) debt load.
Martinsa, which is already in default, wants lenders to agree to defer debt and interest payments. It said in a statement to the Spanish stock market regulator that missed payments could be folded into a new agreement.

Martinsa has been struggling with its creditor banks, hedge funds and other holders of its debt in an attempt to reach a restructuring agreement. Debt agreements need to be signed by all creditors.

The new agreement is likely to cover only a part of the 5.1 billion euros debt pile, not its entirety as the company had originally hoped, according to widely quoted sources. Martinsa failed to make an interest payment this month and did not win a waiver that would have extended an interest payment of 362 million euros, due on March 17. Talks to reach a deal to save the firm from insolvency remain "very difficult," a banking source close to the talks was quoted as saying earlier today.

The negotiations, initially set to be finalised today, will be extended over the next few days. Ahorro Corporacion Financiera, La Caixa, Caja Madrid and Morgan Stanley are lead arrangers of the company's 5.1 billion euro loan, and hold more than half of it. Other debtholders include hedge funds and Collateralised Loan Obligations (CLOs) that control "less than 10 percent" of the debt.

Interestingly, at just about the same time as all this was taking place in Spain, Spanish developer Martinsa Fadesa was busy starting the construction of its first major project in Bulgaria, Stroitelstvo Gradut (Construction and the City) weekly reported. The "first-sod" ceremony of the Modera Residence residential complex took place on March 18.

The complex is located in Sofia’s Vitosha neighbourhood, at about 200 m from the ring road and Simeonovsko Chaussee Blvd, and will have a gross actual area of about 54 000 sq m. Architectural project was prepared by Stroyconsult 999 Ltd, with leading designer Yuri Angelov; general contractors are Livel and Hydrostroy-P; the consultant is Nevon Consult Ltd. The neighbourhood has been one of the most actively constructed areas in recent years. Another two new gated communities, Preslav and Buena Vista, are located in the vicinity.

Now why the above is to some extent worthy of mention is that it highlights the extent to which enbattled Spanish property companies have been trying to save their situation by turning east, but it is not clear at this point whether this will improve or simply aggravate their situation, as the construction sectors in some of the more seriiously "overheated" east european economies - like Bulgaria and Romania may well themselves experience and important property "correction" some time in 2008.

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