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Spain to Rescue Failing Toll Roads

Source: Reuters - Thu 28th Nov 2013
Spain to Rescue Failing Toll Roads

The Spanish government is nearing a deal with the country's main builders and banks to rescue up to nine bankrupt toll roads and take over debt worth up to €4 Bln, 4 sources with knowledge of the talks said.

Motorists have preferred to use Spain's free national highways during the recession so traffic on the toll roads has fallen nearly 40% in the 5-year economic slump.

The government is seeking to create a state company to take on the debt as one long-term, low-interest loan, the sources said. The builders will get 20% of the equity of the new company, taking a hit estimated at €1.7 Bln on their investments.

Builders, including Ferrovial, Abertis, OHL, ACS, FCC and Acciona, created joint ventures to win concessions from the government to build the toll roads during Spain's boom years.

They borrowed money from banks such as Santander, Caixabank, Bankia, Popular and BBVA to do so.

The arrangement avoids debt linked to the troubled toll roads counting towards Spain's deficit as the country fights to reduce its budget gap to hit Europe-agreed targets.

"All the parties are trying to reach a solution," said one source close to the negotiations.

"The alternative would be the toll roads going bankrupt and the government having to suddenly deal with an extra €4 Bln booked to its budget deficit."

However, the loans will swell the country's public debt, already tipped to rise to nearly 100% of economic output next year, its highest level in more than a century and up from 40% at the start of Spain's severe economic downturn 5 years ago.

"The 3 parties are going to lose out and the question is who loses the most. I think the three will opt for keeping losses to a minimum and parking the problem for the long-term on the shoulders of the Spanish taxpayers," said Mikel Echavarren, head of Madrid-based real estate consultant Irea.

It is not the first time that the government has had to step in to mop up the excesses of Spain's housing and construction boom which ended abruptly 5 years ago.

Spain set up a so-called 'bad bank' last year, under the terms of a European bail-out of its lenders, pushing up its so-called contingent liabilities - debt that has been issued by semi-public entities backed by the Treasury - to €181 Bln, equivalent to around a fifth of economic output.

COMPENSATION PAYMENTS

Under European law, if at least half the income of this state-owned company covers maintenance and debt servicing costs, it does not count towards deficit.

The government has said repeatedly any solution to rescue the roads would not hurt the country's deficit.

The plan will need the blessing of the EU competition authorities as the transfer of private debt into the public domain could be deemed a state aid for the companies operating the roads.

Spain's Treasury Ministry and the office of Europe competition chief Joaquin Almunia declined to comment. The Public Works Ministry did not respond to requests for comment. Builders Ferrovial, Abertis, OHL, ACS, FCC and Acciona as well as domestic banks Santander, Caixabank, Bankia and Popular declined to comment.

Spain's 2nd-biggest bank BBVA declined to comment, except for saying that it had already taken into account any possible changes on the current terms of financing for the highways.

In addition to the debt it will swallow, the state will take out at least a further €1.2 Bln at an interest rate of around 6% which it will use to cover the pending compensation payments to people who gave up land for the roads, one source with knowledge of the talks said.

The negotiations center on at least seven bankrupt toll roads, including the 4 so-called 'radial' roads of Madrid, which radiate out from the capital; the toll road that runs out to Madrid's Barajas airport and the toll road that runs from Madrid to the east coast of Spain.

Builders, including Ferrovial, Abertis, OHL, ACS, FCC and Acciona, created joint ventures to win concessions from the government to build the toll roads during Spain's boom years and borrowed money from banks to do so.

They will now have to take a hit on the equity invested in the roads, estimated at around €1.8 Bln by one senior sector source, receiving just a 20% stake in the new company, whose equity will be valued at €600 Mln.

Most of the companies have already written down a big chunk of the losses, meaning the impact on their earnings should be limited.

Domestic banks have also likely already written off their investments in the troubled toll roads, one source close to the negotiations said.

The state and the banks are looking at a new 30-year loan to the state-owned holding company with a low interest rate of 2.6%, one source close to the process said.

"What the banks are doing is refinancing the debt at a much lower interest rate over a long period of time," said one source. "The state will pay back the loan at much more favorable maturities and at much lower interest rates."

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