Thursday, August 21, 2008

The Rain In Spain Falls Mainly On.... The Construction Companies

Well, as they say "it never rains but it pours", and while on the Spanish beaches millions may be idly languishing in the sun doing their best not to think about what awaits them on their return to reality in September, on the Spanish plain the rain never ceases to fall, and torrentially so. On Monday it was Caja Madrid, on Tuesday Metrovacesa, on Wednesday Cortefiel, and today it is the turn of Ferrovial, since Ferrovial, which is Spain’s number 2 construction group, was yesterday faced with the serious possibility it may have to sell three of its British airports over the next year, following a damning report by UK competition authorities which attacked its dominance of the industry and its inefficiency.

In its findings the UK Competition Commission provisionally concluded that Ferrovial’s subsidiary, BAA, should be forced to sell two of its three London airports – Heathrow, Gatwick and Stansted – and either Glasgow or Edinburgh in Scotland. The most likely candidates for sale appear to be Gatwick, Stansted and Glasgow.

The commission’s findings – which will now be put out for consultation – raise serious questions about the wisdom of Ferrovial’s purchase of BAA for more than £16bn (€20bn), including debt, in 2006. Ferrovial, which had net debt of €30.2bn in December 2007, may well find it difficult in the present cilmate to sell assets. On top of which buying dear and selling cheap is hardly a sound commercial strategy, especially for a company heavily in debt. Ferrovial's original 8.75-billion-pound ($16 billion) hostile bid was originally rejected by BAA in May 2006. Ferrovial then raised its bid to 9.73 billion pounds ($18.1 billion) but BAA said it was still too low. The final price was eventually over 10 billion pounds, to which must be added the 3 billion pounds for new investment included in the refinancing of 13.3 billion pound ($24.8 billion) completed only 3 days ago (August 18). Not only do many Spanish companies seem to have made a serious error of judgement in getting so involved in a UK market which was also heavily inflated by its own property bubble (I mean really they couldn't have chosen a worse venue on on this count, except, perhaps, for all those ventures out in boom-bust countries to the East, which we will look into in more detail on another occasion). And in addition, as the pound sterling difts down and down, there are those little details of relative currency values to think about here.

Ferrovial shares are down 46 percent since the it closed the purchase of BAA on Aug. 15, 2006. The deal was funded by debt loaded onto the airport operator, forcing it to focus on what is the world's largest-ever refinancing amid an ongoing global credit crunch. BAA, which runs seven U.K. airports, completed a 13.3 billion- pound reorganization only two days ago. BAA stock has lost 31 percent this year amid steadily increasing speculation about its future and about its ability to carry out its function effectively following the cancellation of 600 flights on the opening of Terminal 5 in March.

And those of us who live in Spain, and are "aficcionados" for the finer details of these things, may like to notice how earlier this month, and while half of corporate Spain was starting to fall apart, the Spanish media had a major campaign whose main objective seemed to be to tell us just what "bad people" Ryan Air were. Looking at the situation of almost all out war which exists between Ryan Air and Ferrovial at the moment, this intense media pressure becomes a little more intelligible. Ryanair Holdings Plc, which is Europe's biggest discount carrier and the largest airline at Stansted, issued a statement today calling BAA an "abusive monopoly'' and declaring that a breakup would bring better facilities and lower prices. This, of course, is not the version the Spanish public are getting. And Ryanair’s David O’Brien, chairman of the airlines consultative committee at Stansted, is quoted as saying that the report confirmed the company’s near-monopoly was “bad for consumers and bad for Britain”. Clearly there is little love lost between Ferrovial and Ryan Air at this point in time.

"We are delighted by the decision, which we have been calling for years,"
Ryanair director of legal and regulatory affairs Jim Callaghan told Reuters.

Spanish Bank Lending Slows Again in June

We also now have the June bank lending data from the Bank of Spain. Surprisingly, month on month the lending was up over May, at a provisional 8.4 billion euros versus 4.8 billion euros in May (net increases month on month), and 6 billion in April. In fact the net lending increase in June is the highest figure we have seen since November 2007.

So things are getting better? Well not exactly, since the details matter, and looking at the fine print we find that the mortage component is only up by something under 1 billion euros of that total (850,000 euros approx) while other lending (which is mainly personal, car and home improvement type unsecured lending) was up by slightly over 7 billion euros, a huge increase over the 1.5 billion euro increases in April and May. And the reason for this is obvious: these loans carry a higher interest rate, and thus they are easier for the banks to intermediate since they themselves can afford to pay more to borrow the money (you know, the 7% they are offering on time deposits etc). The thing is all this money does still have to be paid back, even if it goes up in thin air rather down in cement, something which those lying on the beach in Cancun or having a restful month in Japan might care to think about at this point.

Anyway, whatever the distribution of the lending, the year on year rate of increase continues to trend steadily down, reaching 8.5% in June.

And do remember, it isn't only household lending which is being hit by the credit squeeze on the Spanish banks. As we are now seeing day in and day out, corporates are also being badly affected, and of course the interannual rate of credit increase to corporates is also steadily trending down, hitting an inter-annual 7.2% in June.

Credit Recovery Swaps

Reuters has an article today about how trading in recovery swaps kicked off in Europe this month. Recovery swaps are a credit derivative instrument which analysts think are likely to gain popularity as Europe's economy slows and more companies (as we are seeing in Spain) start to come under stress.

Recovery swaps are bets on the expected percentage bondholders will get of the amount they are owed in the event that a company defaults. No money changes hands unless there is a default and the swap expires unused if the company does not default.

According to Reuters the market in recovery swaps in Europe involves only three or four big dealers and 10 names at the present time - NXP, Hellas Telecommunications, ONO, Ineos, LyondellBassell, Seat, Truvo Subsidiary which is also known as WDAC, M-real, Thomson SA and Norske Skog.

In a recovery swap with a strike price of, say, 30 percent, the buyer agrees to buy bonds at a recovery rate of 30 percent if there is a default. When the default occurs, he benefits if the actual recovery rate turns out to be higher than the level he agreed to pay. The seller profits if the recovery rate is lower than 30 percent.

Reuters cite Mikhail Foux, a New York-based Citigroup director in credit strategy.
a saying that there are a variety of U.S. investors trading in European recovery swaps including hedge funds, investors in synthetic collateralised debt obligations (CDOs) and capital structure arbitrage players, who seek to profit from dislocations between credit and equity markets.

They also cite University of Texas Professor Henry T.C. Hu as making the evident point that holders of CDS could sabotage a company and other debtholders, because they stand to profit more if it fails than if it survives.

The Cobrador Del Frac

Reuters also has a piece on one of those ever so uniquely Spanish phenomena, the Cobrador del Frac. "El Cobrador del Frac", is the name of a company which specializes in sending men dressed like extras from a 1930s Fred Astaire movie to humiliate debtors into paying up. And according to Reuters business is booming.

Well, at least employment is rising in one sector of the Spanish economy. Maybe they'll be sending people to meet the holiday merrymakers off their planes as they arrive.

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