Restructurings: Spanish Banks Have Learned from Previous Crises
February 12, 2024
The Spanish banking sector knows what a corporate crisis entails, having experienced the serious consequences of the 2008-2013 recession – a period that ended with a 14% delinquency rate and the disappearance of half the financial system. Ten years later, the situation is completely different. The COVID-19 pandemic and the invasion of Ukraine, as well as conflicts in the Middle East, have impacted a portion of the business fabric. However, their effects are mitigated by the Instituto de Crédito Oficial (“ICO”, a corporate state-owned entity attached to the Ministry of Economic Affairs and Digital Transformation), which guarantees bank loans through funds from the Sociedad Estatal de Participaciones Industriales (“SEPI”, a Spanish state holding company that is characterized as a sovereign wealth fund) and Cofides (a state-owned enterprise specialized in the management of state funds), and by the new Insolvency Law, which is more agile and suitable for restructuring companies.
In addition, companies have focused recently on strengthening their own resources to better weather tough times. The worst was experienced in 2022, when the record for highest number of bankruptcies since 2013 was reached. In 2023, the situation improved slightly, with a 12% decrease in bankruptcies, according to Solunion, the credit insurance, surety and commercial risk management company.
But the situation is complex. The rapid rise in interest rates and debts carried over from 2020 are complicating the recovery for some medium-sized companies.
The food, agri-food, automotive, real estate, shipbuilding, engineering and construction sectors are industries with slim profit margins that could face difficulties if interest rates remain high. It’s important to remember that even when interest rates decrease, a significant time lag occurs before those decreases are reflected in credit costs. This situation could drive bank delinquency until June 2024. The usual process for defaults starts with individuals, moves to SMEs (small and medium-sized enterprises), and then reaches large corporations – and it’s already affecting SMEs.
By business structure, the most affected sectors will be those with small profit margins and high levels of debt that has become more expensive due to high interest rates. Within those sectors, companies that had to make significant capital expenditures (to acquire assets like equipment, machinery, vehicles, buildings and land to generate long-term benefits) are now facing bleak prospects.
The president of the European Banking Authority (“EBA”), José Manuel Campa, recently stated in Madrid, “We continue to believe that interest rates will eventually lead to increases in delinquency and credit difficulties,” advising entities to “prepare” for it. In other words, the danger remains.
In 2024, problems will focus on medium-sized and small businesses, where banks play a key role in their restructuring. Unlike in previous years, the protagonists in 2024 will not be large funds or bondholders. Already in 2023, 88% of the companies that initiated bankruptcy proceedings belonged to the micro-enterprise and SME segment – i.e. companies with turnover or a balance sheet equal to or less than 10 million euros.
Financial institutions, mindful of reputational risks, will not act as they did between 2008 and 2013; they have improved risk management with more agile and efficient systems, as well as more professional and expert teams, allowing them to address problems with a more constructive attitude. The balance sheet, the level of provisions and the income statement – as seen in recent days – give them significant leeway to tackle complex or higher-risk operations. The new Insolvency Law, supported by judges, does not push for liquidation, as often occurred in the past, but rather favours opportunities for the company to recover, albeit with an economic sacrifice due to reductions. Delinquency is now almost 11 points below the 2013 rate, smoothing the path for restructurings.
Furthermore, the economic cycle, although still slowing down, has a positive outlook, unlike during the tough years of the Great Recession, when the light at the end of the tunnel was not visible at a similar point just a year in . This year, 1.5% economic growth is expected, according to the International Monetary Fund, and that will create a more favourable climate for agreements, although they will not necessarily be easy. Banks must be brave in facing these challenges. Sometimes it will be the owners themselves who propose continuing debt reduction, if they see a future for their company, and other times it will be competitors who seize the opportunity.
At FTI Consulting, we have helped manage processes of varying difficulty and size, and with that broad experience across a range of contexts, we recognize that now is an opportune moment to rectify situations that, having arisen from management errors or other circumstances, may now have the chance for an appropriate resolution.
Now is the time to put company finances in order, as both opportunities and challenges lie ahead. According to the Bank of Spain, a new contraction in loan supply is expected for the first quarter of 2024, focused on household consumer credit. “Loan demand will continue to fall slightly in all segments,” notes the supervisor. Such uncertainty prompts caution, but nevertheless, the underlying trend is positive. Undoubtedly, it will be an intense and interesting year.
February 12, 2024
Senior Managing Director
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