There is plenty of smart money looking for a home in Spain’s distressed debt market.
One well-known private equity firm, which shall remain nameless, is a long way down the track in signing an agreement with a Madrid-based investment firm that can provide a pipeline of deals. That’s the theory, anyway.
The firm in question is by no means alone in trying to hunt down debt assets. As one such hunter puts it, there are plenty of “schmucks” doing the same. (He assures me he uses schmuck as a term of endearment).
As those on the ground will attest, it seems that in each Spanish city there are five or six investment houses that are prospecting real estate loans for buyers, such as private equity firms. It is the same in Italy, only Spain is a larger market.
No question the size of the Spanish opportunity is significant. In that respect, Spain has parallels with opportunities in the UK and German markets. You only have to consider the swathes of unfinished or unoccupied apartments across Spain to surmise how many troubled loans are out there. To put the Spanish pain into perspective, one market observer explained it as such: there is a five-to-seven year oversupply of houses in Spain. In the US, there is less than a year’s worth. Nobel prize winning economist Paul Krugman wrote recently that Spain was basically Florida, but worse. On the commercial property side, large property companies such as Metrovacesa have had their debt restructured.
But one has to question whether Spain is in too parlous a state to make it a classic distressed, counter-cyclical play. In other words, debt purchased at a discount will only drop further if bigger problems come to the fore.
A debt crisis that has brought Greece to the brink threatens Spain as well. A client memo circulated by Connecticut-based investment firm, Bridgewater Associates, suggested recently: “We believe that if there was no country called Greece, Spain (and other peripheral debtor countries, with the possible exception of Italy) would probably have a big debt problem because the amounts they have to roll forward and the amounts of new debt they have to borrow to fund their deficits are too large for the amounts that sensible, profit-motivated buyers are likely to provide in light of their current debt burdens and the rates at which they are being added to.”
Setting aside whether one would want to buy Spanish property-related debt, it is unclear whether the banks will sell loans at reasonable prices. Unlike in the UK, in general Spanish banks and the property market haven’t corrected yet. “In Spain, property values have still not adjusted to the reality of the market,” Javier Garcia-Mateo at property consultants Aguirre Newman told Reuters in January. He added: “We think 2010 will be the year prices will adjust.”
One firm with an operation in Spain told PERE that loans have been taken over by the cajas – the savings banks –but that it was not clear the “right price” could be attached to them.
As Bridgewater Associates suggests: “The private sector debt problems have largely been kept under the rug rather than dealt with via restructurings. In other words, Spain has big debt/deficit problems, and it is not dealing with these problems by doing the tough, forthright things to alleviate them.”
The other problem worth bearing in mind is that the courts are not as friendly to the distressed strategy in Spain as they are in the UK. In this respect, Spain is closer to Italy, where private equity firms in the last decade bought NPLs and tied to foreclose on some of them, but found their economic models under pressure because of the lengthy court processes.
Strategies that involve forging a partnership with a local Spanish player probably stand the greatest chances for success. But the broader question is: will there be deal flow?
The next couple of years will definitively answer this question, with significant consequences for those who have spent time and money preparing to capitalise on Spanish pain.