Spain: suddenly back in the money
The markets, demonized for dragging the country to the brink of disaster, are providing new capital
Spain is a bipolar country. In just a matter of months, the famous markets that everyone keeps talking about have morphed from villainous speculators into oh-so-wise investors. Spain is also a country that is sorely lacking some good news, as Bill Gates' recent decision to buy into construction and services giant FCC proves.
"This is a message of trust with some international echo because it happens to involve one of the wealthiest people on the planet," says a veteran investment banker. "But it also proves that we are not very worldly-wise. In terms of volume, this transaction is insignificant, and it is very likely Gates did not even participate in the decision."
And yet it seems clear that investor sentiment toward Spanish assets has changed. Foreign money is starting to flow back into the peninsula, and even more importantly, the owners of this money are remarkably diverse, as are the targets of their investments: sovereign debt, real estate and corporate acquisitions.
This liquidity is coming partly from the so-called vulture funds, but also from hedge funds, large personal fortunes, pension plans and sovereign funds. So far this year, international investors have bought variable-yield securities, real estate and company stock worth nearly 14 billion euros. Experts consulted by this newspaper believe this capital will keep flowing in the short term, but they warn about the risk of premature celebrations, since there are still many financial challenges up ahead. And there's nothing quite as skittish as money: it could hightail it out of the country as fast as it got here.
It is so important to have productive investment in order to consolidate"
"All eyes are trained on Spain. The money first reached public debt, then the stock market. Now the last step is missing: for that foreign wealth to reach productive investment. Let's hope that happens soon," explains the chief executive of one of Spain's leading listed companies. "The first half of the year was worse, but there's been a change, especially since September. The last quarter of this year and the first quarter of 2014 are going to be good. There is sure to be growth. The risk lies in a rebound effect - in other words, a sudden spurt of growth that is not sustained over time. That is why it is so important to have productive investment, in order to consolidate this improvement."
The Ibex 35, the Spanish stock exchange's blue-chip index, has gained 20 percent since January. One of the main gauges of changing market sentiment toward Spanish assets is the investor relations department of listed companies. Brian Warren has spent nearly a decade visiting the world's main bourses - London, New York, Paris, Boston and Frankfurt among others - as the department chief for Bolsas y Mercados Españoles (BME), the operator of all Spanish stock exchanges and financial systems, and he can attest to this new attitude. "The level of attention has improved. The phone is ringing off the hook and our road show agenda easily includes 15 to 20 meetings a day, when just two years ago it was hard to schedule more than eight."
Warren explains that investors are still asking questions about imbalances in the Spanish economy, but that there is a completely different perception compared with the time when a possible bailout and the collapse of the euro were recurring themes. "There is still some interest in macroeconomic aspects, although now we have more time to focus on purely corporate issues and explain the potential of the business model."
This expert also talks about a significant change in the type of investor who is interested in Spain, something which could mean less volatility. "Even during the worst of the crisis, there were always hedge funds who were interested. They would listen to you, and depending on whether you managed to convince them or not, they would go for the short or the long term. Now we are seeing more long-term funds that only make a move when they find an asset for a good price."
We will relapse into recession unless we do our homework by next summer"
The shareholders of many companies are making use of this window of liquidity to restructure their portfolios. This explains the boom in "accelerated book building" or ABB, which entails offering large amounts of equity shares in a very short space of time, mainly to foreign funds. That is how Crédit Agricole divested itself of its stake in Bankinter, and how Juan Abelló, one of Spain's wealthiest businessmen, sold his shares in construction and real estate firm Sacyr. Telefónica and Repsol have sold some of their own shares, while Bankia got rid of its IAG and Mapfre stock.
While it was conducting an ABB, Banco Sabadell also welcomed two major Latin American investors into its shareholder family: Jaime Gilinski of Colombia and David Martínez of Mexico. But theirs is not the only capital from the Americas to reach Spain in recent months. In August, the Mexican group ADO bought the bus company Avanza. "For the great Latin American fortunes, Spain is the gateway to Europe. [...] A year ago, when we were visiting clients in Brazil and other countries, their major concern was whether we were going to go bankrupt," admits the chief for Spain of a private bank. "Now, however, the large Latin American fortunes we're working with are closing deals in Spain, both in terms of buying shareholder stakes and in direct company acquisitions."
Another example that illustrates the new investor appetite for Spain is the fact that the biggest national equity securities fund is managed by a foreign firm, Fidelity Iberia. So far this year its assets have grown by 531 million euros, largely from non-resident investors. Thomas Balk, the head of Fidelity's investments outside the US, says that "there is renewed confidence in the Spanish economy, most particularly in local businesses." He notes that the Ibex is still very far from its historical highs while other indexes are already at pre-crisis levels. "Let's not forget that historically the stock market anticipates economic recovery by six months."
Investors are not just descending on listed companies. Foreign venture capital has awakened, and in the first part of the year international funds represented 47 percent of total investment volume through 13 transactions. "Outside investors are once again interested in good investment opportunities in our country," says a spokesperson for Ascri, the venture fund business association.
A year ago, clients' major concern was whether we were going bankrupt"
Springwater Capital, a private equity fund based in Switzerland, made its first Spanish investment this year when it bought Indra's digital documentation business. "In the last year we have devoted significant personal and financial resources to Spain. It is one of the most attractive markets to invest in today," says Martin Gruschka. The founding partner of Springwater Capital says that this is "the right time" to partner with Spanish small and midsized businesses. "There are many businesses of this nature with significant potential. Due to the crisis and the lack of financing, they have suffered and become unable to compete abroad. Access to capital and quick industrial consolidation in Spain will pave the way for the creation of strong companies sure to be successful in the national and global markets."
This fund's goal is to close two more deals this year and "at least" two more in the first half of 2014. "We are not focusing on any specific sector. We like complex situations, such as the acquisition of divisions of major corporations to stay on as long-term partners," adds Gruschka.
Another one of the industries where transactions are starting to make a comeback is the one that originated the crisis: real estate. Property purchases by international investors this year will double those of the last two years, coming in at close to three billion euros. It is the same trend that was previously noticed in direct investment by non-residents (chiefly Russians, Chinese and Latin Americans) after the Spanish government offered residency papers to high-income buyers. These sales constituted around 1.4 billion euros in 2012 and are now up to over 2.8 billion in the first half of this year.
"We believe in Spain and we want to invest more in this country," says Ken Caplan, head of the real estate division for Blackstone in Europe. The US venture capital giant has closed one of the most talked-about deals in the sector: the purchase of 1,860 controlled-rent housing units from the city of Madrid for 125 million euros.
"We have seen a revolution in the property market in the last six months, with the arrival of investment funds and international opportunity asset managers interested in banks' foreclosed account portfolios, bad loans, services platforms and rental home portfolios - things that would have been unthinkable just a few years ago," holds Mikel Echavarren, CEO of the consulting group Irea. Like other real estate experts, he believes that foreign investment will increase over the next two years. "They have eliminated last year's worst-case scenarios from their horizon and the big players are attracting other investors. They have ruled out the panic coefficient that Spain had because of the absence of maximum macroeconomic risks and because of banking regulations, which allowed lenders to provision their loans and close transactions."
For now, the figures being handled by the consulting firm CBRE estimate investment in real estate assets at around three billion euros so far this year, a figure that is expected to surpass four billion according to Ignacio Fonseca, an investment expert at the company. If so, this will double the property investment figures of the last two years. And 70 percent of these acquisitions are by foreign investors. "Spain is one of the main countries on the radar of international funds. Property prices have adjusted much later than in England, France or Ireland. Now, after a considerable price drop, investors are interested in buying. They feel that the adjustment has been made, but they also need to see an economic recovery, and that is why they think this is the time to invest," says Fonseca.
The largest operations conducted so far this year by outside investors were by Fibra Uno, owned by Mexico's Grupo E, which bought 253 branch offices of Banco Sabadell for 300 million euros; Goldman Sachs and Azora purchased 3,000 rental homes from Ivima, Madrid's housing agency, for 201 million euros; Lone Star-Fortress-Cerberus acquired a credit portfolio from Banco Santander and Diar, a fund from Qatar, is now the owner of Barcelona's Vela hotel after handing over 200 million euros.
"It's not just opportunistic funds that are buying real estate assets in Spain," says Pedro de Churruca, director general of Jones Lang LaSalle, who feels that more conservative funds are also seeing the potential of higher rents after five quarters of stable prices. Meanwhile, the opportunistic funds, chiefly from the US and Britain, base their operations on reductions of 30 to 40 percent on the price of property or debt; they want a 15- to 20-percent annual return on their capital, with an investment horizon of three to five years, experts explain. This is what Blackstone, Cerberus, Goldman Sachs, Lone Star and others do. The core funds, which are more conservative and generally hail from Germany, France, Switzerland and Latin America, seek prime real estate offering returns of eight to 15 percent, within a timeframe of five to seven years, based on rent hikes.
It is worth remembering that the Madrid Housing Agency's top rents have fallen from 44 euros per square meter in 2007 to just under 25 euros, notes Fonseca. This is the preferred investment for Fibra Uno, Intu Properties and the Canadian pension fund, which acquired the shopping mall Parque Principado.
"I don't think the opportunity funds buying property platforms from the likes of Bankia, Catalunya Caixa and Caixa Bank are thinking solely about speculating and getting out in 12 months. I think they are showing confidence in the Spanish market for the next five years," says the head of Irea, who feels that large amounts of foreign capital entering Spain is a positive development, even if it will be a long time before this money trickles down to the real economy and the country's families.
Money is returning to Spain and this is good news because it is a sign of a normal economic situation. But it's too early for celebrations. Alberto Spagnolo, director of investment in Spain for the Swiss bank Julius Bär, puts it this way: "Capital influx grants our country a unique opportunity until next summer to do our remaining homework. Otherwise, we will relapse into recession. Among the pending tasks are accelerating the privatization process and approving measures to attract productive investment, not just financial investment."
Analysis: Debt all round
The influx of foreign investment in Spain in recent months seems more than just symbolic, and it reinforces the increasingly favorable image of the Spanish economy and of the stability of the euro zone.
A year ago it was hard to foresee such a drastic change: in October 2012, the dilemma was basically whether to request a full-blown bailout (not just for the banking sector) or not. Since then, the risk premium has been halved and Spanish lenders returned nearly 200 billion euros to the European Central Bank, leaving debt levels at 244 billion euros, just slightly higher than what Italian banks owe the ECB. A comparison of both banking systems could be summarized by the recent IMF forecast that Spanish and Italian lenders will accumulate 239 billion euros in losses in the coming years; of these, 104 billion euros will represent Spanish debt. The IMF thinks that the sector has enough resources of its own to cover for those losses, unlike the Italian banks.
Will the Spanish economy grow enough over the next three years to prevent the IMF forecast from coming true and avoid another round of bank recapitalization? The answer lies in the resulting effect of two forces pulling in opposite directions: the influx of all kinds of foreign capital and the fulfillment of deficit targets, which is what sets down the Spanish economy's roadmap.
The fact that Brussels softened up on the 2013 target gave the Spanish economy some breathing room this year. The same will happen in 2014, with a target of 5.8 percent which is not all that strict. From then on, the Spanish government and the European Commission will face another difficult dilemma: if deficit targets are relaxed for two additional years, the debt-to-GDP ratio will soar to 112 percent. If they are not relaxed, the economy will relapse into a recession.
That is why the influx of foreign investment is so important, especially if it comes in the shape of businesses settling down here or expanding their Spanish operations. Spain now offers a qualified workforce at competitive prices (21 euros an hour compared with 30 in Germany and 49 in Norway). This way, the key to growth does not just rest on the public sector adjusting its spending, or on exports doing as well as they have so far.
Thus the great fuss over a financial investment by Bill Gates, over the sales of bad assets by Sareb (Spain's bad bank) or by the fact that some investment banks are interested in bidding for Novagalicia Banco. The investment really matters.