Investment Banks Look to Spain for Bargains

Lehman Brothers and other investment banks, private equity firms and hedge funds are lining up to buy distressed Spanish assets as the steep economic slowdown offers investors big discounts.

Lehman has purchased stakes in distressed senior bank debt, the law firm Ashurst said recently, providing a rare glimpse of insight into the normally secretive world of such transactions.

The U.S. bank also bought stakes in a defaulted senior bank debt agreement, Ashurst said in a brochure on distressed transactions, in which investors take on parts of troubled companies at a discount.

Such deals - not normally disclosed by banks wary of showing their positions - also include the purchase by the U.S. private equity firm Apollo of a portfolio of receivables from two Spanish banks, Caixa Galicia and Banco Popular, according to Ashurst.

"We expect more nonperforming loan sales to follow," José Christian Bertram, a partner at Ashurst, said at a presentation to investors about Spain's distressed market in London last week.

Lehman, Apollo and Carval all declined to comment.

Spain has become the center of focus for Europe's restructuring bankers, such as Rothschild, Lazard, Houlihan Lokey, Goldman Sachs and Cyrus, eager for business after years of dearth in distressed deals.

"We think Spain is going to be a very interesting market for opportunistic players," said Antoine de Cockborne, an associate at City Property Investors. "This is the start of a very difficult situation. It will hit the bottom. We're looking for discounted assets."

The Spanish economy is faltering after a decade-long boom that saw house prices almost triple. Spaniards who borrowed against the rising value of their homes to buy cars and second homes are struggling to pay their bills.

The global credit crunch and record oil and food prices are squeezing Spanish consumers and forcing local shops to close down. Empty stores with "for sale" signs have become a common sight around the country.

Investors in distressed debt are also looking at firms such as Cortefiel, a clothing retailer bought by the private equity firms PAI Partners, CVC and Permira in 2005. Its debt trades at about 50 cents per dollar.

Retailers and service providers face tough times as customers leave unpaid bills. Investors may buy the bills for as little as 10 percent of face value, offering those who risk it an attractive yield.

Bank of America and WestLB bought a portfolio of receivables from Vodafone in Spain worth €190 million, according to Ashurst.

But chasing assets in Spain can be harder than investors think, because servicers - agents in charge of recovering debts - are not as sophisticated as in other countries, said Juan Hormaechea, a partner at Ashurst.

"The services market in Spain is underdeveloped; they are slow and not used to mortgages," Hormaechea said. "Some buyers buy portfolios without knowing that the servicer will become the bottleneck."

Prices are another barrier, as distressed assets may have to fall still further to attract investors.

"At the moment, we have more sellers than buyers," Bertram said.

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