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Spanish real estate debts turn toxic
By Mark Mulligan and Victor Mallet
Published: November 4 2008 00:11 | Last updated: November 4 2008 00:11
Spanish banks wisely shunned the toxic financial instruments that crippled several of their international peers. And they can meet their wholesale funding needs with the help of €150bn ($191bn) in emergency Spanish government guarantees and asset purchases.
But Spain’s banks and cajas (the unlisted savings banks) cannot avoid the impact of their domestic property crash.
They are exposed not only to mortgaged homebuyers but also to thousands of struggling property developers and construction companies.
As developer after indebted developer collapses and hands over devalued property projects to creditors, the issue of bad real estate debts has emerged as the biggest threat to the health of the Spanish banking system, according to senior bankers and regulators.
The Bank of Spain’s inspectors at banks and cajas are anxiously studying the creditworthiness of 50,000 small, speculative developers as well as the big 15.
Spain’s residential housing bubble burst last year, paralysing homebuilders and leaving nearly 1m new houses and flats unsold. Now the malaise is spreading to commercial property and public works.
David Stix, chief executive of Iberian Equities broker, said: “Banks, especially savings banks, are heavily exposed to real estate developers, and we expect the inventory overhang of homes could take five years to resolve”.
At the end of June, total bank credit for property developers reached a record €313bn – nearly 10 times the level at the start of the decade – while loans for construction companies stood at €156bn, according to the Bank of Spain.
Many of these corporate loans are turning bad at an alarming rate. Bankers in Madrid say up to a third of the lending to property developers – typical estimates range from €40bn to €90bn – could go bad before the slump ends. At several cajas and banks, the generic bad debt provisions set aside in recent years will quickly be drawn down.
The collapse of Martinsa Fadesa, one of Spain’s biggest developers, was partly responsible for a €9bn surge in overall bank bad debts in July, and by August total bad and doubtful debts in the banking system reached €46bn, or 2.5 per cent of loans. The ratio could reach twice or even three times that level, bankers say.
Signs of distress are already visible. Caja Madrid, one of the strongest cajas, reported a sharp rise in its non-performing loan ratio to 3.57 per cent in the third quarter.
Lenders, however, are keen to avoid any more high-profile corporate collapses. Rattled by Martinsa’s failure, they have arranged complex refinancing deals that amount to life support for cash-starved builders and developers.
In the most recent case, Reyal Urbis refinanced about €3bn of debt. Under terms agreed with lenders, led by Santander and its subsidiary Banesto, the company’s first repayment falls due in October 2011, and the last, for 40 per cent of the capital, four years later. This “bullet” structure has become standard in Spanish debt workouts.
Metrovacesa, a leading Spanish property group struggling to service its debt, has also been shedding assets, and is considering selling back to HSBC the UK bank’s London headquarters for up to £300m less than it paid for the office tower last year.
The crisis is turning the banks into substantial real estate owners and brokers themselves.
Banesto in July said it would use its own branch network to sell Reyal Urbis properties as part of a joint venture aimed at helping keep the company afloat.
Other banks, including Santander, have been quietly swapping debt for real estate assets for the past year, and some have switched debt for equity. Banco Popular, a mid-sized listed bank, and savings and loans leader La Caixa have been left with a joint 15 per cent stake in Colonial.
One Spanish official says: “In the last crisis, savings institutions got a lot of houses, and that turned out to be the best business they ever did in their lives”.
Even if that trick can be repeated, however, the dire state of the property market means it could take years for banks to offload the homes that they financed and that should never have been built.
Copyright The Financial Times Limited 2008