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Analysis: Zombie borrowers threaten bailed-out Spanish banks

SPANISH banks are a little jauntier after a dose of European cash to purge them of their toxic real estate assets, but their refinancing of moribund companies in other sectors could put them back in the emergency room.

Whether out of optimism or desperation, Spanish banks have refinanced billions of euros of debt owed by struggling companies large and small, including property-related firms, to prevent them going bust and avoid writing down the loans while they wait for economic recovery, financial sources said.

But with rising unemployment, falling consumer spending and a return to recession, any recovery looks a long way off, even after the €100 billion lifeline that Spain's euro zone partners stumped up for its banks on June 9.

"Very often banks have rather continued supporting companies on pre-insolvency scenarios instead of facing losses head on and making write-offs and forcing the company into liquidation. This has been very common," said Alberto Manzanares, refinancing expert at the Clifford Chance law firm in Madrid.

The bad loan ratio in the Spanish banking system has already hit an 18-year high of 8.37 percent of outstanding loans in March as Spain's borrowing costs soared, thrusting the country into the heart of the euro zone debt crisis.

Defaults are expected to rise as recession pushes more families and companies under and if a sector audit as part of the European rescue flushes out refinancing of insolvent companies.

The Bank of Spain does not provide data on refinancing, but Bankia, a protagonist in the banking crisis after requesting €19 billion in state aid, and fellow lender Popular recently stepped forward to admit a steep rise in potential corporate debt losses.

Bankia nearly doubled provisions against its €69 billion non-property corporate loan book and put coverage at 6.8 percent, while Popular unveiled coverage against a €79 billion non-property loan portfolio at 7.9 percent.

"While banks like Bankia are more exposed than others to troubled property assets, they've all refinanced corporate debt, kicking the can down the road," Enrique Quemada, head of M&A advisor ONEtoONE Capital Partners said.


Spain's nonfinancial private sector debt is 134 percent of gross domestic product, higher than any major economy in the world except Ireland, where figures are distorted by the presence of foreign multinationals, according to a January report on global debt by consulting firm McKinsey.

The high debt dates back to Spain's champagne years in the late 1990s and early 2000s, when scores of companies binged on cheap credit. Like all good binges, the price has been a crippling hangover.

"It's hard to find a company that has not done a refinancing over the past few years. It's in the bank's interest to keep a company alive, not only to avoid booking losses but also because the company's employees or suppliers probably have mortgages and loans with the bank as well," said Valencia-based lawyer and bankruptcy expert Jose Luis Corell.

Between 50 and 60 percent of Spanish businesses have needed some kind of refinancing in the last three years, delaying debt payments by putting up fresh guarantees, the head of risk at one bank said.

Beyond Bankia and Popular, Reuters consulted 11 banks, but only Sabadell provided details, saying it has a €56 billion non-property loan book with coverage of 7 percent.

Most banks said refinancing was part of standard client dealings and the chief financial officer of one major Spanish bank downplayed the danger of a new wave of defaults of SMEs in a recession, saying "by far the vast majority of refinances have been appropriate".

Spain's conservative government forced banks to recognise more than 80 billion euros in potential losses on loans and assets related to the property market, but to the surprise of many it did not weigh down on risky refinancing.

"Banks' SME portfolio is very vulnerable to an economy in recession, so they'll have to come up with provisions to cover this portfolio," said Maria Jose Lockerbie, managing director at Fitch Ratings credit agency, in a presentation to a financial seminar in Madrid in May.

Credit Suisse estimates that four of Spain's largest banks - Santander, BBVA, Sabadell and Popular - should set aside a further 65.4 billion euros against non-property loans, taking coverage to 7.3 percent from 2.2 percent currently.


Excluding banks, companies listed on Spain's blue-chip IBEX 35 index have combined debt of €222 billion outstripping their market capitalisation of €216 billion, according to Thomson Reuters data.

It is no secret that Spanish banks have propped up companies considered "too big to fail" such as ACS, one of the world's largest construction and services groups, saddled by €9 billion of debt in 2011 versus core profit of 2.3 billion.

Banks have extended repayment of €1.4 billion of ACS's debt that was due to expire this year until July, 2015, and the company is counting on asset sales to help repay €1 billion before January.

"Refinancing has perhaps been an issue for some big companies involved in property and construction, but banks simply haven't had the funds to string along the smaller ones," said Ruben Manso, economist at consulting firm Mansolivar & IAX and a former Bank of Spain inspector.

Indeed, as many as 1,958 companies filed for bankruptcy in the first quarter, up 21 percent from a year ago, with small firms and construction-related businesses comprising the majority.

Among other public Spanish companies, loss-making firms from technology group Ezentis to manufacturer Uralita have refinanced debt this year.

Ezentis and Uralita said their refinancing deals, aimed at buying time to repay debt, reflected banks' confidence in business plans that carried a significant international focus.

"Many companies that cannot pay their debts are asking banks for three or four years to draw up strategic plans to sell assets when the market has improved. We have two or three of these processes on the go at the moment," Manzanares said.

But what if Spain's economy deteriorates further?

According to a ONEtoONE study based on 210,000 Spanish firms with sales of more than €2 million in 2009, 22 percent were "seriously indebted", with debt over five times core profit.


The Bank of Spain declined to comment, beyond explaining its rules on recognising non-performing loans. It allows loans that are refinanced before turning delinquent and interest-only loans to be considered "performing" on banks' books.

The central bank also specifically follows large-scale corporate refinancings to make sure they are not done to hide bad debt, according to the bank's statutes. There is no oversight for smaller ones.

"The banks are holding up the companies that are in really bad shape to cover their own loss, and by doing this they can't afford to lend to the healthy companies. This is damaging the whole Spanish corporate network," Quemada said.

Young entrepreneurs have made strides to branch away from Spain's previously construction-dependent economy and into more technology-focused markets with export potential.

But fresh credit to businesses has steadily dropped since 2008, meaning that healthy enterprises and new initiatives are struggling to flourish. Total lending fell 4.2 percent to €944 billion in 2011.

If money is granted, it comes at a high price.

"We're a young, promising business, but the banks are only offering credit at exorbitant rates, inhibiting our growth," said Lourdes Jimenez, a partner at Baum Control, a small technology services firm.