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Spain's construction sector forced to seek growth abroad

Source: Bloomberg - Tue 11th Dec 2012
Spain's construction sector forced to seek growth abroad

Bloomberg has reported how Spanish builders are becoming increasingly reliant on foreign banks as they seek fundiing to weather the current financial crisis.

"We are having more difficulties with access to credit," said Susana Monje, chief executive officer of Grupo Essentium, a construction firm based near Madrid that turned to Germany's Deutsche Bank AG for backing to win a contract in India this year. "There's a label for Spanish companies and if you have that label, then you have it more difficult."

Loans to Spain's construction sector have flallen by 40% from their 2007 peak to €91.8 billion, according to Bank of Spain data.

Spanish builders such as Essentium and Actividades de Construccion & Servicios SA are paying the price for the frail state of the country's banking system as they seek to tap growth abroad to compensate for a collapsed market at home. While helping fuel a housing boom before the bubble burst in 2008, lenders have since become reluctant to support the construction industry's growth ambitions, instead focusing on reducing domestic real estate losses and cutting lending risks.

The country is about to receive around €40 billion in bailout funds as soon as tomorrow after reaching an agreement for as much as €100 billion of EU aid to stabilize its banking system earlier in the year. Under the terms, Bankia group and 2 other nationalized lenders, whose combined assets amount to around 20% of Spain's banking industry, will have to cut assets by more than 60% by 2017.

‘Significant Barrier'

Loans for construction as a percentage of GDP fell to about 9% from 15% in the same 2007 - 2012 period.

"It's true that financing conditions have got tougher," Jose Manuel Loureda, general director of international business at SACYR, a construction company based in Madrid, said in a telephone interview. "It has become a significant barrier to overcome."

Spanish bad loans may increase further as the economy continues to shrink in 2013, the Bank of Spain said on Nov. 5. Banco Santander and BBVA, Spain's largest lenders, were downgraded 2 levels to BBB and BBB-, respectively, by Standard & Poor's on Oct. 16. The firm also cut the ratings of 9 other banks and placed 6 on credit watch "negative".

Tougher Competition

Builders are also struggling to regain the confidence of investors, with ACS being forced to disclose more financial information to win foreign orders than in the past, spokesman Juan Jose Diaz said. Spain's biggest construction company started to "bid pretty much anywhere" as customers grew more cautious and competition toughened, he said.

While Essentium's infrastructure construction unit in July won a 30-month contract worth €26 million to build a 67Km section of railroad in India it had to first line up a counter-guarantee from Deutsche Bank after the contractor declined to accept its backing from a Spanish lender, said Monje.

"We have only encountered this situation once, it's not wide-spread and we hope this doesn't get any worse," she said. "The issue of guarantees is one of the most decisive factors for Spanish companies to be successful when expanding abroad. We could attack the market much more for railroad projects if we had more support in terms of guarantees."

‘Negative News'

Spain is relying on the ability of its companies to build their businesses abroad, with the economy mired in its second recession since 2009 and more than 25% of the working population unemployed. GDP may fall 1.5% this year and next, before increasing 0.5% in 2014, a Bloomberg News survey shows. By comparison, the euro-area economy is seen returning to growth next year, a separate survey shows.

SACYR, whose international business accounts for about 40% of revenue, up from 36% a year ago, is seeking to further expand abroad after winning contracts in countries including Panama and Angola in Q3, said Loureda.

At Essentium, Monje said the lack of funding at home has forced the builder to "find resources where we didn't look before," such as consortiums with local partners.

"All the negative news on Spain is having a negative impact on Spanish companies," she said. "The construction sector needs to reinvent itself or die."

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