Decision day for Spain’s financial sector

This summer has seen a major test of Spain’s banking system following the restructuring of the country’s savings banks (cajas) with the listing of two new banks – the first major Spanish IPOs since 2007 – with the risk of failure potentially catastrophic for many within the finance sector.

Las recientes salidas a bolsa de dos bancos en España han demostrado la capacidad no solo de reestructurar instituciones financieras y responder al apetito de los inversores, sino de recibir un voto de confianza internacional hacia la economía española, afirman algunos abogados. Sigue habiendo incertidumbre respecto a la salud en general de la eurozona pero España está haciendo todo lo posible por transmitir signos de mejora.

Ahead of the August break, lawyers and bankers have been working hard to ensure the success of two of Spain’s most significant financial transactions of recent years; the flotation of two entirely new banks, Bankia and Banca Cívica. Both are the products of mergers among Spain’s troubled cajas and the success of which may yet prove a turning point for the country’s economy, say many.
“Despite the events continuing to unfold in the eurozone, the IPOs have emerged as a test of confidence in Spain’s financial institutions and the Spanish capital markets themselves,” says Sebastián Albella, a Partner with Linklaters in Madrid who advised the underwriters in the Banca Cívica listing. “A year ago, at the height of the crisis engulfing Spain and the cajas, you could not have predicted that this would have been one of the outcomes.”
Spain’s cajas may have been protected from the fallout of the international sub-prime crisis, as a result of strict Bank of Spain rules over the use of off balance sheet and special purpose vehicles, but the ensuing credit crunch and collapse of the country’s real estate sector in 2008 left a large number with significant liabilities.
Cajas have traditionally been run along regional lines, are non-profit and, with hindsight, seem to have been unduly influenced in their decision-making by local politicians and even prominent businessmen. The lack of transparency of the cajas’ governance mechanisms, with examples of soft loans to directors and questionable investments, meant however that as real estate values fell, holes emerged in the balance books of many.
“The cajas account for over half of Spain’s banking market and their well-being is inevitably tied to the health of Spain’s economy as a whole,” says Albella.

A new order
In light of the pressures on the sector and the cajas’ inability to raise outside private capital – their statutes forbid it – and the imposition of new capital adequacy rules, the Bank of Spain set a deadline of June 2011 for them to balance their books or accept state funds. Under the new regulations, banks must raise their core capital up to eight percent from six percent – or 10 percent if they are unlisted.
New legislation was also passed enabling cajas to restructure into private banking entities, allowing the injection of outside capital for the first time. Aided by the Government’s €9bn Fund for the Orderly Restructuring of the Banking Sector (FROB) the result has been a wave of restructurings and mergers reducing caja numbers from 43 to 17 over the past year.
Spain’s business papers have been filled with headlines detailing the varying successes and failures as each caja sought out new funds or merger partners – welcome work for many of Spain’s leading firms. Albeit, earlier this year Alicante-based Caja Mediterráneo (CAM) was effectively nationalised after the disclosure of a €2.8bn hole in its accounts – twice the €1.45bn shortfall calculated by the Bank of Spain.
Even in such a context, many were nonetheless surprised by the announcement in January that one of the largest new private banking entities, Bankia, was to seek a listing on the main Bolsa de Madrid – Spain had not seen a major IPO since Iberdrola Renovables in 2007. The product of the merger of seven cajas – led by dominant Caja Madrid alongside Bancaja, La Caja de Canarias, Caja de Ávila, Caixa Laietana, Caja Segovia and Caja Rioja – and presided over by former IMF Managing Director Rodrigo Rato, it revealed that it hoped to raise as much as €4bn from a mid-July flotation.
This was followed shortly after by a statement by smaller Banca Cívica – the merger of Cajasol, Caja Navarra, Caja Canarias and Caja de Burgos – that it too hoped to raise around €850m from an IPO.
Listed structures would enable both to also access the debt capital markets and finance international expansion and thus try to emulate the success of leading public banks like Santander and BBVA – which have emerged relatively unscathed by the domestic financial crises because a significant share of their revenues are now generated beyond Iberia.

No guarantees
The ability of the banks to float however meant significant challenges in terms of restructuring both their books and internal Governance systems, say lawyers. Bankia created a separate “bad bank” in the form of its parent holding company (Banco Financiero y de Ahorros) which manages €18bn of toxic real estate loans.
The two banks’ relative liquidity also contrasted sharply with that of the country’s largest caja, Barcelona-based La Caixa which announced that it too was to restructure as a publicly listed entity.
With the sensitivity surrounding the markets, some senior lawyers involved in the listings preferred not to comment, but many acknowledge that La Caixa had the good fortune to already have a publicly listed investment vehicle, Criteria, into which it could fold its banking operations and create CaixaBank – scheduled to go live on July 1st. Caixabank’s banking business has a book value of €9.5bn, but also manages la Caixa’s holdings in companies including Repsol and Telefónica which combined bring its total value to over €20bn.
Uría Menéndez was mandated to handle the CaixaBank restructuring while Clifford Chance advised La Caixa’s Board. Uría Menéndez, led by Managing Partner Luis de Carlos, was also chosen by Bankia for the domestic issues surrounding its IPO, alongside Davis Polk & Wardwell for the international tranche, with Linklaters advising the underwriting banks. Banca Cívica selected Madrid-based Ramón & Cajal with Linklaters again advising the underwriters.
CaixaBank’s debut proved a success, few had suspected otherwise, but came just days after Bankia and Banca Cívica published details of their own sharply discounted offerings – 60 percent below book value.
“The importance of the listings is not only a question of money. It is about the relative transparency of the new entities, to prove that they were well managed and there was belief in their future directions. The new regulatory requirements arguably accelerated the process, but the IPOs were also ultimately driven by the banks’ collective desire not to seek assistance from FROB,” says Daniel Alaminos, a Partner with Ramón & Cajal and led the team advising Banca Cívica.
In light of the issues facing the eurozone, and the impact of an escalating Greek crisis and bailout of neighbouring Portugal on the Spanish economy, the two offerings took on ever-greater significance, say lawyers. Doubts also began to emerge over the bank´s ability to attract sufficient international institutional interest.
Just a few weeks ahead of the listings, Telefónica, which was assisted by usual adviser Garrigues, cancelled the proposed 50 percent IPO of its call centre operations Atento as a result of market uncertainties. While only a few days before, the European Banking Authority announced that five Spanish banks were among the eight European lenders that had failed a second round of “stress tests”.
“The markets are inevitably very sensitive to the wider issues affecting Spain, but every deal is different. The banks were a test of how the international financial markets viewed not only the business case that the banks put forward but Spain’s as a whole,” says Alaminos.
Both Bankia and Banca Cívica passed the tests albeit reportedly achieving the bare minimum core capital ratio requirement of five percent. Bankia ultimately went to market on July 16th followed a day later by Banca Cívica, respectively raising €3,4bn and €670m.

Goodwill
Not usually known to overplay the significance of transactions, lawyers across the capital markets sector continue to emphasise that the importance of the listings outweighs both their relative values and legal complexity. Rodrigo Rato, Chairman of Bankia, also described the listing of his bank as “Decision day for Spain’s financial system”.
“The deals were significant in all respects, as proof of the restructuring of the cajas and a better, more transparent, form of management but also of the continued appetite for Spanish equities at a time when there is little good news emerging about the domestic economy,” says Yolanda Azanza, capital markets Partner with Clifford Chance in Madrid.
A further banking IPO is now tentatively planned for later in the year, of Banco Mare Nostrum, a merger of Caja Granada, Caja Murcia, Caixa Penedès and Sa Nostra, but some suggest that further bank listings, for the time being, are far from guaranteed success.
In Spain’s inter-connected business world, among the more significant acquirers of Bankia and Banca Cívica stock were institutions in which they themselves hold stakes. Some say the Spanish Government also used its influence to encourage institutions to support the IPOs for the “good of Spain”. Whether the goodwill lasts until the autumn – especially with a general election due – is far from certain.
“The fallout had the banks not succeeded is almost unthinkable but what the new banks have shown is that with the right structures, and discounts, new finance is possible,” says Azanza. “But issues remain around the ability of further banks to access the equity or debt capital markets and institutional investors remain reluctant to commit to either.”
There is also the matter of the proposed IPO of Spain’s State Lottery in the autumn. The market perception is that many investors would prefer to place their money with the lottery than gamble it on a bank. Even in a good year, lawyers say they would likely see only six significant IPOs.
For the firms involved in the Bankia and Banca Cívica listings the deals are highly significant too. If not from a technical legal perspective then because of the market profile they bring. “To have played a role in both transactions is something of which we are very proud,” says Albella. “It is not yet business as usual, but the success of Bankia and Banca Cívica has laid the groundwork for future deals.”
Spain’s finance community may have breathed a collective sigh of relief but lawyers acknowledge that events beyond the country control continue to weigh down on international investor sentiment. It may therefore yet be some time before we see IPOs of equal significance.

Subscribe now to receive your copy of Iberian Lawyer