Firms Eye up Cajas’ Assets

Firms Eye up Cajas’ Assets by Toby Lewis – www.EFinancialNews.com

24 Jan 2011

Spain’s troubled savings banks – Cajas de Ahorros – which account for €1.3 trillion of assets, are up for grabs. But despite law changes that allow foreigners to take majority stakes, deals are still running at a trickle.

Some private equity firms have been circling, but the gap between sale price and buying price has failed to narrow sufficiently for a deal to be struck.

That may change in the summer when the issues surrounding Spain’s sovereign debt become clearer. The cajas’ balance sheet difficulties are widely believed to be one of the principal reasons for doubts over Spain’s economy and, as the European sovereign debt crisis has worsened, the clamour has increased for them to shore up their capital positions.

It emerged last week that the Spanish government plans to raise up to €30bn in an attempt to support the banks, according to The Wall Street Journal.

The belief that the cajas need additional funding has left many investors and bankers arguing the banks should sell off the large number of stakes they own in corporate Spain.

The institutions own industrial portfolios with numerous stakes in big and small Spanish companies. The cajas’ larger property books, which include land banks and property loans, are viewed as more difficult to sell, and Spain’s real estate collapse has made many wary of valuations.

Spanish banks provided nearly €500bn of loans to property developers and housebuilders at the end of 2008, according to Fedea, a Spanish economic foundation. Spanish house prices have fallen only 13% since the beginning of the crisis, according to Spanish government figures, less than in the UK and the US.

However, a million homes remain unsold in the country and investors fear prices have further to fall. Eusebio Martín Pozas, head of investor relations at Spanish buyout firm Mercapital, said: “The sale of the industrial portfolio of the cajas is an obvious and potentially straightforward way of generating liquidity and strengthening their balance sheets.

“As they hold something similar to a private equity portfolio, a sensible thing to do would be to hand it over to professional private equity players either by a straight sale of it or by outsourcing its management. In the straight portfolio sale scenario, an alliance between a secondary specialist [which buys portfolios of assets] and a local player, such as ourselves, would be interesting.”

Vanessa Gelado, vice-president of Spanish real estate investor Drago Capital, said: “The Bank of Spain is pushing through regulation forcing the cajas to mark down distressed assets in their books. There will come a point when it makes sense for them to sell assets.”

Complex legal structure - The problem faced by the cajas is they have a complex legal structure, with no shareholders, which makes it difficult for them to raise additional capital.

Even though the Spanish government made it legal for outside investors to buy majority stakes in the banks last year, private equity firms are still struggling to find a way to buy the institutions or to take shares in them.

US buyout firm JC Flowers opened talks about investing in a caja last year, looking to invest in Banca Civica, although this deal has fallen quiet as Banca Civica conducts a merger process with rival savings bank CajaSol. Once this merger is complete, JC Flowers plans to reopen talks with Banca Civica, JC Flowers said. Banca Civica was not available for comment.

Karim Khairallah, a managing director at distressed specialist Oaktree Capital Management, said: “The caja structure is highly complex and the environment they are operating in is more and more uncertain. We have been looking to work with them to structure the right solutions that meet their ever-changing needs and to try and plug the liquidity gap that is growing.”

Khairallah said his firm had proposed structures to cajas that could provide private equity-style returns in partnership with the institutions. The Spanish government appears to be keen to make it easier to buy cajas, accelerating its programme of allowing the institutions to convert into a more traditional banking structure.

Michael Kalb, senior managing director at US turnaround firm Sun Capital Partners, said: “There is a steady stream of [portfolio] companies from the cajas that we are seeing on a regular basis. The real litmus test will be in four to five months, when it becomes clear what is going on in the sovereign debt market.”

Market participants said that although the saving banks are looking to sell companies, they are not generally accepting the discounts sought by private equity buyers.

Juan Díaz-Laviada, chief executive of US buyout firm Advent International in Spain, said: “The cajas and other institutions are willing sellers right now. Whether they are willing to do so at the right price, or not, is a different thing.”

Deals from last year involved the acquisition of assets. Sun Capital Partners bought gaming company Famosa, and Advent International acquired the Spanish property valuation company Tinsa, both from groups of cajas.

US firm Cerberus Capital Management and Drago Capital have bought 97 branches of Caja Madrid, the Spanish capital’s main savings bank.

During the real estate boom, the cajas relied on the wholesale markets for funding and hit a crisis when this dried up, forcing some to merge and turn to the European Central Bank and the Spanish government for loans and money.

Swiss bank UBS estimated Spanish banks would need an infusion of €20bn from the capital markets but could need to raise up to €120bn to inspire investor confidence.

The cajas deny their financial situation is as bad as outside investors believe. A source close to the cajas said: “We maintain the organisations are well capitalised. There is no need for them to raise more capital, but they can if this is necessary.”

The catalyst to force a large sale of assets or a buyout of a caja has yet to emerge, but international pressure over Spain’s sovereign debt may provide it.