21 March 2011 | By Joanne Harris
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Spain’s legal market is emerging from the downturn in good shape thanks mainly to the government’s move to restructure the country’s financial services sector.
A cross Europe law firms have been riding the turmoil of the past two years on a wave of restructuring and contentious work. Wherever you turn, the story is the same.
But nowhere, perhaps, has this been more noticeable than in Spain. Despite a handful of decent M&A deals in recent months, the main work keeping Spanish lawyers busy is the mass restructuring of the country’s financial sector and the large-scale privatisation programme.
In 2010 the Spanish government turned its attention to solving problems caused by the financial crisis that affected the country’s unique savings bank sector. These banks, known as cajas, were originally established on a regional basis.
However, during the pre-crisis boom years many cajas developed large portfolios of real estate and construction assets. According to the Bank of Spain, the savings banks developed more acute weaknesses than other parts of the financial sector as they expanded outside their traditional geographic areas and had stakeholder models that made it complicated to issue equity.
Last year the government amended the law governing the cajas and began subjecting the whole banking sector to stress tests. These tests were tough and covered areas including the composition of the banks’ portfolios, impairment and a breakdown of any public aid previously received.
During the summer the Spanish financial regulator tightened provisioning rules in order to accelerate the coverage of non-performing loans and to give banks an incentive to sell foreclosed assets or assets received in payment of debt. This process identified 46 per cent of savings banks’ portfolios, amounting to e100bn (£86bn), as problematic.
Under legislation passed last year, the 47 savings banks will be amalgamated into just 17. It is this process, along with an increase in capital requirements and the listing of the new entities, that has lawyers hard at work.
Freshfields Bruckhaus Deringer’s Spain managing partner Iñaki Gabilondo highlights the scale of the work. “Imagine that in the UK 50 per cent of the financial market was to be restructured,” he says.
The restructuring of the cajas is very much a political decision, aimed at creating financial institutions that are not set up to make a profit.
“The situation,” says Javier Villasante, a corporate partner at Cuatrecasas Gonçalves Pereira, “will lead to many opportunities, because most of these cajas have investments in many sectors of the Spanish economy. They need to divest many of these assets to capitalise and be in a better position with their core capital ratio. The strict rules will also force the cajas to divest some of their industrial portfolios.
“You’ll see, in my view, some opportunities in this sector, and this may interest not only funds or banks, but also perhaps private equity players, funds that are more interested in distressed companies.”
The majority of law firms in Spain, both domestic and international, have some involvement with this restructuring process. Baker & McKenzie Spain managing partner Luis Briones is pleased that the firm made the decision in 2010 to hire partner Manuel Pizarro, who was formerly the chairman of both the Spanish Confederation of Savings Banks and one of its members, Ibercaja.
This, says Briones, has given Bakers a crucial link into the restructuring work. He says it has been focused mainly on the cajas that were suffering most.
“The reorganisation’s limited to recapitalising those savings banks and making sure they become sound from a financial point of view,” he explains.
High interest rate
He and other lawyers report considerable interest from foreign investors as well as Spanish investors in the cajas.
“The interest we’re seeing from foreign investors, at least to get information, is quite substantial,” says Briones.
However, he is unsure as to how much of this interest will translate into actual investments.
“Uncertainty, both in respect of the financial situation and with regard to Spanish politics, affects investment decisions,” he adds. “Clearly this is an opportunity both for the savings banks and for the market, but it remains to be seen how this will crystallise.”
The cajas’ restructuring has some way yet to run.
“Last year we thought that in December 2010 the restructuring should have been finished and it wasn’t,” says Javier Ybáñez Rubio, who heads Garrigues’ corporate and commercial team.
Ybáñez Rubio explains that the savings banks planning to list have the rest of this year to raise capital from private investors. Cajas not going through the IPO process must raise capital, either through investment or through divesting assets, before September. If their capital remains insufficient after that time, savings banks will have to apply to the Fund for Orderly Bank Restructuring (Frob) for help.
As Briones notes, the restructuring process means “exciting and complicated times” for banks, investors and their legal advisers. Elections set for May could also affect the way the government approaches its effort to safeguard the Spanish financial system and cut the deficit.
At the moment, however, the other big piece of work that is ongoing is privatisation. There are two state organisations set for privatisation - the state lottery, Loterías y Apuestas del Estado, and state airport owner and manager Aeropuertos Españoles y Navegación Aérea (Aena).
The privatisation of the lottery was announced in December and a bidding process for work began. Lawyers report that it has since been delayed and there is some uncertainty over the future of the programme.
Meanwhile, things are hotting up over Aena, both legally and socially. The announcement that the government wants to sell a 49 per cent stake in the agency has led to trade unions representing Spanish airport workers calling a strike over the Easter holidays.
Bids from law firms for the coveted role of advising Aena itself on the privatisation were due last week, with almost every major corporate firm in the country having pitched for the project.
Pérez-Llorca’s eponymous senior partner Pedro Pérez-Llorca says the Aena bid process has been transparent and open. He believes the successful firm will have demonstrated that it has experience in carrying out large-scale transactions.
“I believe the test can be met by several Spanish firms as well as several international firms,” opines Pérez-Llorca.
“What they’re trying to do is create a private business company and they’ll transfer all the assets of Aena, and after that they’ll initiate a process in which they’ll ask for private funds,” says Carlos Vázquez Cobos, a regulatory partner at Gómez-Acebo & Pombo, Spain’s fourth-largest firm by turnover. “It’s interesting for us because in the past this kind of public work was generally financed by project finance operations and the construction companies. There’ll be more opportunities for participation.”
Even those firms that are not bidding for the Aena mandate will likely be involved in the process through advising potential investors.
Lawyers are relieved that this sort of reorganisational work is available, as M&A transactions have been thin on the ground in Spain recently. One of the biggest was also in the airways sector, as British Airways (BA) and Iberia finalised their merger in late 2010. Garrigues bagged the mandate to advise Iberia on the e5.3bn transaction, with Uría Menéndez acting for BA.
Uría also had a role in the e7.5bn acquisition by Spanish telecoms giant Telefónica of Portugal Telecom’s 50 per cent stake in Brasilcel.
Managing partner Luis de Carlos says these types of deals helped Uría to its 4 per cent turnover rise in 2010; and the firm has a similar forecast for this year.
“My impression is that, despite the economy, which is in the process of adjusting to the new situation, the firm’s keeping busy,” says de Carlos.
Others are also seeing positive signs in the first months of the year. Allen & Overy corporate partner Juan Barona reports growing activity in the private equity sector.
“In terms of private equity activity, the opportunities are there but the size of the transactions continues to be slightly smaller than it was,” says Barona, comparing the market now to pre-crisis. “In terms of opportunities for private equity companies, we’re working on two potential medium-large transactions in the market. There are signs that companies have money and the appetite to do things.”
Villasante at Cuatrecasas says the Spanish energy sector is busy at present too, in common with those of many other countries in Europe.
Steady as she goes
One difference noted by several firms in Spain between their country and their neighbours’ is the relative stability of the Spanish legal market in recent months. There have been few big lateral hires. The exception is Olswang’s launch in Madrid with a team from Bird & Bird, followed by more hires in early 2011.
The US presence in Spain was also boosted by the Hogan & Hartson and Lovells merger in April 2010. Hogan Lovells Spain managing partner José Luis Huerta is pleased with how the integration of the two firms has gone.
“Up to now I think the balance is good,” he muses. “Spanish clients are doing business abroad in the US, so it’s good for us to have the opportunity to offer legal services in the States.”
The slow rise in activity in Spain means the stability of the market could well be shaken up. Pérez-Llorca says recruiters are busy, while Freshfields’ Gabilondo believes the legal arms of the ’big four’ accountancy firms - Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers - are also on the search for lawyers.
Although Gabilondo acknowledges that the big four would not be competing with the large corporate law firms, he nevertheless says he would not under-estimate the potential for them to shake up the market.
Financially, Spanish firms performed solidly, if unexceptionally, in 2010. Data gathered for The Lawyer’s upcoming European 100 supplement shows the biggest five firms - Garrigues, Cuatrecasas, Uría, Gómez-Acebo and Roca Junyent - all posted turnover rises of between 1.9 and 5.5 per cent.
This puts them in a good position for growth in 2011, driven by the restructuring and reorganisation that will keep lawyers in Spain busy for many months
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