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Spain's Debt-Laden Companies Attract Private Investment

Source: Reuters - Fri 9th Apr 2010

U.S. private equity groups are set to snap up stakes in distressed Spanish companies hungry for capital in a credit-starved economy and could play a key role in whittling down a mountain of corporate debt.

Lawyers say they see the groups are increasingly negotiating with companies' creditor banks, hoping to secure a reduction in debt in exchange for taking a slice of the company's equity.

"We are beginning to have more movement in this area. Prices may now be becoming interesting," said Inigo Villoria, insolvency lawyer at Clifford Chance in Madrid.

Spanish companies built up massive debt loads during the boom years of the early 2000s when entry to the euro gave access to cheap credit, pushing non-financial business debt to one of the highest rates in the developed world.

Corporate debt, excluding banks, stood at 136 percent of gross domestic product in 2008, outstripping Britain, the United States, Japan and fellow eurozone members like France and Germany, according to a McKinsey Global Institute study.

There are early signs that investors are moving in, even if valuations may have to come off further for companies to be more interesting.

Liberty Acquisition Group reached a deal with Spanish media group Prisa in March which will lead to a $900 million cash injection into the indebted owner of El Pais newspaper, resulting in the sale of most of its shares to the U.S. group.

The cash, coupled with proceeds from the sale of minority stakes, will reduce debt at the company to around 4.5 times earnings before interest, debt and amortization from 7.8 times in 2009.

U.S. private equity group Cambium said on March 22 it was considering injecting about 300 million euros into the world's leading olive oil bottler, Spain's SOS although the deal would be conditional on SOS restructuring its liabilities.

One Madrid-based private equity source said prices had further to fall. Multiples of 10 times EBITDA were too demanding for debt-laden companies exposed to Spain's struggling economy, he said.

He said some of the companies were on the market for 6 to 7 times EBITDA, but that those had poor business plans that scared off private equity.

Banks, facing growing bad debts from property developers after Spain's real estate boom and bust, may prefer to write off some of the companies' debt rather than attempt to recover it all through Spain's drawn-out insolvency process.

"Now may be the time to see the banks and ask them what do you prefer, getting your debt recovered through bankruptcy or having part of the debt canceled beforehand and avoiding the insolvency procedure," said Villoria of Clifford Chance.

Bankruptcy rates are ballooning as companies squeezed by falling demand can no longer service their debts. Nearly 6,000 businesses went into administration in 2009, 80 percent more than the previous year.

Jesus Almoguera, lawyer at Ashurst law firm in Madrid, said high debt loads hampered many profitable companies despite healthy cash flow and sales growth, making them attractive propositions for hedge funds prepared to pay down debt.

"The problem in today's Spanish economic crisis for companies is their debt, not their business," he said.

Not only are businesses struggling to pay off debt, they are also having trouble accessing credit to fund their working capital as banks staunch their flow of credit during Spain's worst recession in 50 years.

Spanish banks are having to increase provisions against bad loans, cramping their ability to lend.

"The lack of credit worries me more than the levels of company debt," said Juan Carlos Martinez Lazaro, economist at IE Business School.

Jose Maria Munoz, partner at Spanish private equity firm MCH Private Equity, agreed.

"Banks are not lending," he said. "There is an overall lack of financing from the system which is making the system worse."

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