Oxstones Investment Club™KKR & Co. (KKR) and Apollo Global Management LLC (APO) are vying for a slice of Spain’s 1.5 trillion-euro ($2 trillion) lending market, as private equity firms snap up customers the nation’s banks deem too risky a bet.
“The banks are becoming a lot choosier about who they lend to,” Mubashir Mukadam, the London-based head of European special situations at KKR, said in a telephone interview. “We’re clearly looking at a number of opportunities for more deals.”
Spanish banks’ stock of loans has dropped 20 percent from the 2008 peak of the credit boom, while record defaults and the 26 percent jobless rate make the industry reluctant to lend. As regulators tighten rules on refinancing loans, space is opening up for private equity lenders, said Carlos Rueda, a partner in the banking and finance department at Gomez-Acebo & Pombo lawyers in Madrid.
Lending to individuals and companies shrank by 27 billion euros, or 1.8 percent, in July from June, even as financing terms for banks improve amid lower sovereign bond yields. The premium investors charge to hold Banco Santander SA (SAN) covered bonds maturing in 2020 rather than German bunds was 166 basis points at 10:20 a.m. in Madrid, down from a peak of 422 in July 2012.
‘Big Funds’
“I’m detecting a lot of interest from big funds that are interested in occupying this lending space,” Rueda said in a Sept. 18 interview at a conference in London organized by Debtwire. “They are going to be new players in the lending market as banks give up some ground.”
Uralita SA (URA), a Spanish building materials company, turned to KKR in April when it took 320 million euros in seven-year financing to replace existing bank debt and bonds. The firm was forced to act to meet a deadline to find alternative financing, Javier Gonzalez, a board member of the Madrid-based company, said in a phone interview.
The funding provided by KKR comes with greater flexibility than bank loans as part of the interest payments can be delayed until the end of financing term, said Gonzalez, adding that the cost of the transaction wasn’t public. KKR also contributes to running the company with its know-how and contacts, he said.
Uralita Deal
“Everyone is very happy with the way it’s going,” he said. “Our perception is that the banks are still not being at all receptive to taking on any additional risk.”
For KKR, the Uralita deal offered the opportunity to lend to a solid company that was suffering as a result of Spain’s six-year economic slump and property crash, Mukadam said. The banks “had very little interest in extending their loans to a good but highly cyclical company, which we feel, based on the due diligence that we have done, is at the trough of the cycle,” he said.
The Bank of Spain has tightened rules on how banks treat 208 billion euros of refinanced or restructured loans, creating opportunities for private equity. The changes mean it’s “more expensive for banks to keep lending to sub-optimal or sub-performing businesses,” Mukadam said.
As well as one-on-one deals with companies, investment firms have started acquiring lending businesses and real estate assets amid signs Spain’s two-year recession is bottoming out.
Apollo agreed this month to purchase Evo Banco, a unit of nationalized lender NCG Banco with 702 million euros of loans. In March, New York-based Apollo agreed to buy FinanMadrid, an auto and consumer loan unit, from the state-owned Bankia group.
“We believe there is a direct lending opportunity for consumers and SMEs,” Andres Rubio, a partner at Apollo European Principal Finance in London, said in an interview, adding that the firm has 1 billion euros of performing loans in Spain. “Even a small slice of this market represents a huge opportunity for a new entrant.”
Spanish Homes
H.I.G. Capital, a U.S. investment firm with $13 billion under management, bought a majority stake in a portfolio of almost 1,000 homes last month from Spain’s bad bank, in the first asset sale by the vehicle set up last year to absorb soured real-estate from rescued lenders.
Investment companies’ advance into the Spanish lending market risks being held back by the terms they demand, as companies may refuse to pay higher financing costs, said Alberto Garcia Elias, a managing director at March Capital Markets in Madrid.
Private equity firms typically seek annual returns of 8 percent to 15 percent for direct-loan transactions, he said. At the same time, banks may become less wary about lending to medium- and large-sized companies as the economy improves, he said.
“As yet, there is probably more money looking to invest than there are real transactions,” Garcia Elias said in a phone interview. “The cost of capital and the returns being sought are high, and there aren’t many companies that can bear these costs.”
Traditional Funding
The challenge for investment firms is to persuade Spanish companies that financing via direct lending can be their best chance, as traditional sources of funding remain scarce, said Stefan Lindemann, the Madrid-based director of H.I.G. WhiteHorse, an affiliate of H.I.G. Capital that’s investing in direct lending in Iberia.
“Overall it’s my impression that the banks are far from able to lend freely,” he said. “There’s a lot more talk than action. The challenge is to get companies to come to terms with the fact that while money used to be easy and cheap to come by in Spain, it isn’t any longer.”
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