Moody's Warns Of Ratings Presure On Spanish Debt

Spanish asset-backed bonds isssued in 2006 and 2007 face credit-rating pressure according to a report out this week from credit ratings agency Moody's Investor Service. Moody's cut its performance outlook on Spanish debt secured by consumer loans to "negative" from "stable/negative". This move brings debt secured by consumer loans into line with bonds that pool home and company loans, according to the Moody's statement.

The weaker outlook means "increased negative rating pressure'' on bonds backed by Spanish consumer loans, the report stated. Spain thus joins the U.K. and Ireland as the only countries in Western Europe to have negative performance outlooks for all the asset classes measured by Moody's in the report, that is for debt secured by consumer and company loans and mortgage-backed bonds. Not coincidentally these are the three EU countries (together with Denmark perhaps) most at risk of serious macroeconomic problems resulting from the credit crunch induced housing correction.


Reyal Urbis Looking To Delay Debt Repayment

According to El Economista this morning, the Spanish real estate company Reyal Urbis is in talks with its creditors in an attempt to delay its debt payments. Two of the group's creditors - Banesto and Banco Santander - appear to be in favour of the debt refinancing plan, which seeks to extend the expiry date on some 3 billion euros ($4.4 billion) in loans by seven years.

Reyal Urbis, like a lot of other Spanish real estate companies, is facing increasing pressure to meet growing debt payments as revenues shrink and asset values drop on the back of the property crisis. The company, which is one of Spain's biggest developers and was formed through the merger of Urbis and Reyal in 2007, said at the end of last month that first half net losses jumped 874 percent percent to 332 million euros ($489.4 million). Revenue rose to 823 million from 624 million a year earlier as it sold off property. But financing costs were 191 million euros and the company also made provisions for 252 million euros due to falling property values.

Some 80 percent of Reyal Urbis sales come from residential properties and land -  a market that has slowed to a virtual standstill in most areas of Spain at the present time. House sales were down - for example -  29.6 percent in June year on year.

Reyal's net debt, which totalled 5.8 billion euros a year earlier, fell to 5.5 billion in H1. Reyal Urbis had total assets of 8.1 billion euros at the end of the first half, down 13.7 percent from a year earlier.

Colonial Struggling To Refinance

Another struggling property company, Colonial, said yesterday that it expects to finalise a multi-billion euro debt refinancing over the next few weeks, but turning this desire into reality looks to be quite problematic. Colonial, like  Reyal Urbis, is basically at the mercy of its lenders, and these have only granted temporary moratoriums on the debt at this point.

The proposed 8.9 billion euro ($13 billion) debt restructuring - with main creditors Goldman, Eurohypo, Calyon and Royal Bank of Scotland - is thought to be vital to save Colonial from insolvency in the very short term. The general consensus seems to be that extra cash investment by Colonial's main shareholders, Banco Popular and La Caixa, is highly unlikely.

Colonial was last bailed out back in April by a consortium of Spanish banks, led by La Caixa and Banco Popular, who swapped debt for a stake of about 23 percent in the firm. Popular has already made clear that it will  not inject fresh cash into the company, although reuters cite a source close to the Colonial refinancing process as saying  the bank had recently given a 40 million euro credit line to Colonial  - but as reuters also point out, this is  a mere drop in the ocean for a company whose  debts are now  pushing 9 billion euros. Colonial's reported assets include subsidiary property firm Riofisa, majority-owned French real estate company Societe Fonciere Lyonnaise  and 15 percent of Spanish building and services group FCC. Any sale of the FCC stake, whihc was bought for 1.5 billion euros or 78 euros a share at the end of 2006 (but which now has a market value of less than half that) would involve a substantial loss.

Colonial reported a 2.38 billion euro loss for the first half  of 2008 last Sunday, after taking charges for plunging asset values. Colonial shares have lost around 90 percent of their value over the past 12 months.

What all this seems to indicate is that more and more companies in the property sector are "wobbling", quite how long the wobbling will continue until the next candidate for the chop falls is basically anyone's guess. But the situation as far ahead as the ete can see, is very much for more of the same, with the pressure on Spain's bank sector simply mounting and mounting. 

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Update Friday 5 September


Colonial's foreign creditors are reported this morning to have agreed to refinance 6.1 billion euros ($8.86 billion) of the company's debt but they are still talking to domestic banks over the 1.48 billion of loans they have outstanding with them. The latest agreement would seem to give them some breathing space, though really it only seems to be putting off the inevitable.

Colonial now appear to have a basic agreement in place with their principal non-Spanish creditor banks RBS, Calyon, Eurohypo and Goldman Sachs who hold approximately 80 percent of their debt. Which is simply another way of saying that the exposure of La Caixa and Banco Popular is for less than 20% of the total 8,9 billion euro debt (1.48 billion euros reportedly), which in terms of liquidity and non performing loans issues in the Spanish banking system is obviously good news. I wonder how general the Colonial position is - that is, I wonder to what extent the burden of real estate and construction company busts is going to be shouldered outside Spain.

Colonial is thought to be less exposed to the worse-affected residential and land markets, since 83 percent of its assets in commercial property, but if we expect the present Spanish recession to be a long and deep one (and I do), and if we look at the general over-leveraging in Spain's corporate sector, then it surely can't be that long before the market in commercial property also goes the way of all flesh.


Tourism Down

And it isn't only construction and the banking sector who are feeling the squeeze, after 50 years of almost uninterrupted growth, Spain's overbuilt and relatively expensive tourist resorts seem to be starting to struggle, with steadily increasing competition coming from cheaper, less crowded destinations like Croatia and Turkey.

"In 48 years, I have never seen losses like this; tourism bosses I'm talking to have never suffered so much," said Domenec Biosca, president of Spain's Association of Tourism Directors and Experts.

Spanish tourism seems to have been really struggling this summer, as both Spaniards and foreigners travel less distance, stay less time and spend less money. Spain's biggest hotel group, Sol Melia, reported profits fell 41 percent in the first half of the year, while those at business hotel group NH dropped 20 percent. Revenues in the Canary and Balearic islands have fallen as much as 12 percent this year, according to estimates from the Association of Tourism Directors and Experts. Spain is now overloaded with what are politely known in the trade as "mature destination", and tourism, which accounts for up to 15 percent of Spain's GDP and one in seven jobs, is suffering just as the economy needs it to take up the slack left by the rapidly contracting construction sector.

For the first time in a generation, Spaniards are being forced to cut back spending on things like vacations as incomes stagnate, prices rise and credit dries up. Unemployment, which was up  by over 100,000 in August to a 10-year high of 2.5 million, has become a major concern for the first time in years, and the purse strings are not only being tightened, they are having a knot tied in them.

Spain was the world's No.2 tourist destination after France last year, with almost half of the 60 million foreign visitors coming from Britain and Germany. But both these countries are now facing recession themselves, and the British are turning away from eurozoen countries after the GB pound's fell 15 percent  against the euro over the last 12 months. Britain's Thomas Cook, Europe's No.2 travel company, has cut destinations in euro-zone countries and boosted offerings to Egypt and Turkey, which received 25 and 15 percent more tourists last year, respectively.

Eight percent fewer foreigners arrived in Spain this July according to the hotel confederation CEHAT, and in some northern areas, mainly visited  by the Spanish themselves there was an even larger 15 percent fall  over the summer. So at the present time one of the main activities which could have taken up construction slack is itself in decline, industry is suffering the effects of a eurozone-wide slowdown, and  so that only leaves us with agriculture. But to increase agricultural output you need water, and resolving the nation's long standing water supply problems was just one of the issues successive Spanish governments were unable to resolve all through the good years of the boom. So if there is one thing you could say we are consistent about down here, it is in being able to while away the good times in order to be totally unprepared to face the bad ones, even if we could recognise them as and when they arrive.