Growing pressure on the banking sector is increasing opportunities for private debt players in Spain, according to Pemberton’s director of origination in the country, Cassandra Rivilla-Lutterkort.
While the UK and France continue to dominate the European private debt landscape and Germany begins to catch up, structural developments in other countries, including Spain, are set to increase the number of opportunities available to private debt investors outside of these core markets in the future.
According to Rivilla-Lutterkort, the Spanish banking sector has been slower to feel the effects of the financial crisis that have led to the growth of private debt in other markets, such as the UK.
“Spain’s recession was more pronounced in 2011 and 2012 around the time of the euro crisis,” she explained. “The banks still need to catch up with the profit targets they will need to meet to bring them in line with banks elsewhere in Europe.”
She said Spanish banks are still typically able to offer pricing at between 250 to 350 basis points over Euribor even for single B-rated credits, which makes private debt offerings that are typically 600 basis points over Euribor seem highly expensive.
However, in order to meet more demanding profitability targets, banks will need to increase their pricing in these areas, making private debt more competitive.
Additionally, Spanish banks are also facing a significant mortgage scandal linked to the IRPH interest rate, which the European Court of Justice has warned could be considered abusive. This could lead to widespread compensation claims from affected mortgage holders, putting further pressure on balance sheets.
However, Rivilla-Lutterkort said it is not only bank difficulties that are driving private debt investment in the country.
“We see a lot more sophistication among both the private equity and debt advisory community in Spain, and the market is becoming less price sensitive,” she said.
Sponsors are increasingly open to considering other aspects of private debt, such as flexibility and speed of execution, rather than purely focusing on price, she added.
Pemberton has completed four deals in Spain this year, including two with private equity sponsor InvestIndustrial. The first was a public-to-private deal for Natra, which provides chocolate and cocoa products, while the second was an acquisition of Neolith, which provides sintered stone services for bathrooms, wall cladding and furniture.
Pemberton had previously looked at Natra with another sponsor for a deal that did not complete and was able to work quickly with InvestIndustrial, as it had already done its due diligence on the asset. In the case of Neolith, speed was also important, as the sponsor had secured an exclusivity window but was concerned about working with debt funds that are tied to private equity houses through fear of possible information leakage.
Figures from Deloitte’s Alternative Lender Deal Tracker show that there were 21 deals completed in Spain in 2018 and 25 in 2017. This is up from just two deals in 2013.
Rivilla-Lutterkort said Pemberton is hopeful for completing more transactions in 2020.
“We don’t expect to do four deals in Spain next year but if we did two or more we would be pleased with that, as we’re seeing around 40 opportunities each year in the country,” she said. “While there are not many companies in Spain with a €20-€30 million EBITDA that we would typically look for, the pipeline includes a number of larger firms that are set to come to market later this year and the debt advisory community is expecting a very active 2020.”