The 2020 Covid apocalypse was sanitary. This year it will be economical. The European Central Bank and its reinforced anti-pandemic arsenal, with a firepower at the beginning of 2021 of more than a trillion euros, together with the shields deployed by the Government and the European Union have anesthetized the beast. But a part of the productive fabric is damaged and needs to be rebuilt. An exercise of refinancing, restructuring and profound changes in business models is coming. The mission is not only to survive but to prepare to grow in a strong and sustainable way, with the vaccine as a great wall of defense against the virus.
The hardest will come at the end of the second quarter, once the painkillers in the form of bankruptcy moratorium, which expires in March, temporary employment regulation files (ERTE) and armored bank loans begin to cease to take effect. SEPI’s rescue fund, with 10 billion euros, will play a crucial role.
Air Europa has already raised 475 million. Globalia and Barceló request 240 million. The steelmaker Celsa, 350; and Duro Felguera, Naviera Armas y Tubos Reunidos more than 100 million each.
“SEPI will be key in some companies. These must demonstrate their viability in the medium and long term, ”says Javier Menchén, partner at Ramón y Cajal. Experts consider that the amount is sufficient, but it can always be raised if it falls short. “Their objective is to support equity and liquidity in the short term, they do not have a permanent vocation and they are being very flexible,” according to José Carlos Cuevas de Miguel, EY partner in the restructuring area.
Instructions not to sink
The desire to achieve liquidity, which has been translated into loans shielded by the ICO for more than 110,000 million, was justified. But not only do you have to ask for money, you also have to spend less. “The companies will continue to carry out viability plans, which while the pandemic lasts will be based on adjusting costs to survive with minimal cash consumption and on controlling expectations of being able to repay sustainable debt in that situation,” warns Julio Manero, managing director from the area of restructuring by Alvarez & Marsal.
Non-essential business sales will be a formula to achieve urgent liquidity
“It remains to be seen if the liquidity buffers will be sufficient,” warns José Christian Bertram, Ashurst’s financial law partner in Madrid. The money with the shield of the public bank, although it can be returned in eight years with two of grace, is not the panacea. It will be necessary to put the spoon in the balance of some companies.
“Every restructuring involves three steps that must be executed with great care. In the first place, analyze the financial situation, the ability to pay of the business and the capital structure; secondly, to negotiate the new structure with shareholders, creditors and suppliers, and, finally, to bring the plan to fruition ”, explains Borja Arteaga, partner at PJT Partners. This bank specialized in restructuring is representing Naviera Armas bondholders and is in contact with other companies that may require its services in the immediate future. “For the sectors affected by the Covid (…) there are years of uncertainty and a lot of work,” adds Juan Sierra, managing director from the company.
Alvarez & Marsal foresees capital needs of up to 136,000 million euros for Spanish companies to regain solvency in the most extreme scenario. “There are companies that will not be able to continue; the aid has served to lift their heads out of the water, but they will end up sinking. Others will survive, but they will have to put their balance sheets in order ”, warns Vicente Estrada, managing director by Duff & Phelps.
There are also more reassuring visions. “The theory says that at some point in 2021, and depending on how the economy evolves and the measures of governments, many companies will suffer liquidity crises and will be forced to put order in their capital structure due to high indebtedness. We will see what happens in practice ”, says Francisco García-Ginovart, director at Houlihan Lokey and who participates, or has done so, in numerous restructurings, such as those of Abengoa, Adveo, Aldesa, Bodybell, Celsa, Codere, Dentix, Dia, Eroski, Eurona and GAM, among many others. “We don’t see the market as active yet. We work with companies that already had problems in their capital structure and the Covid has increased the problems ”, he adds.
Capital increases will reach almost all sectors, but investors will be very selective
Other experts go further. “We are optimistic for 2021. Most of the Spanish companies will meet their financial commitments without difficulties; The problems will be limited to small businesses in specific sectors or companies that were already in bad shape before the pandemic, ”says Guillermo Prada, partner at PradaGayoso, a firm specializing in restructuring.
The core of power
The holders of the new holy grail of liquidity are the hedge funds and venture capital. “They will be able to acquire assets at attractive prices, execute alternative financing operations and carry out acquisitions at a discount of damaged debt to proceed with its restructuring”, anticipates Pedro de Rojas, partner of banking and of restructuring & insolvency de Linklaters.
The funds have already entered the debt of companies such as Telepizza, Haya Real Estate, Cirsa, Codere, Gestamp, Antolin, Tendam and WiZink, among others. Most of these bonds trade below nominal. Be careful, this is a warning to sailors. Classic creditors sell at demolition prices to give ground to these new players, who are not going to sit idly by. They take a high risk buying bonds of distressed companies, but in exchange they hope to take a loot. That is, to force a conversion of these titles into capital and thus stay with the company. Examples of this are Naviera Armas, where the bondholders have taken a part of the capital, although the founding family retains control. This was not the case in Lecta, where the creditors took control of the private equity CVC.
And it not only happens with the listed debt, but also with the bank. Entities are fleeing some companies. In Celsa, for example, almost all of the liabilities, of about 2,800 million euros, are in the hands of funds that they have bought in recent years.
Some asset acquisitions in recent times have been the fuse that has lit the bomb in several companies. For example, two buttons: Caprabo’s by Eroski 13 years ago and Trasmediterránea by Naviera Armas in 2018. Buying voracity has caused devilish situations. “Some firms could find themselves with a large financial debt and insufficient cash flow to cope with this burden derived from an anomalous and unprecedented situation,” says the managing director the PJT Partners.
Shareholders tend to go to the limit and are reluctant to dilute their holdings
Here corporate operations come into play. “The sales of non-essential divisions, caused by the need to obtain money immediately, will lead to M&A operations,” anticipates Álex Soler-Lluró Borrell, partner responsible for restructuring at EY. Eduard Arruga, partner in charge of the department of financial and banking law at Osborne Clarke, and Vicente Conde, managing partner of the same firm, speak along the same lines. They suggest that companies should now focus their efforts on their traditional businesses. “The pandemic has highlighted the need to restructure many businesses: some forced by the financial situation of a company and others to adapt its business model. In this sense, the catalysts for the latter are digitization and decarbonization ”, they argue.
And not only that. Protective mergers are already a reality in Spain. In banking, that of Bankia with CaixaBank and that of Unicaja with Liberbank. More may come …
There is also activity in the tourism sector. “The hotel companies thought in May and June that this was over. Now they have seen that they were wrong and they are moving with sales of assets, real estate operations or search for debt of the funds ”, reveals Eduardo Navarro, executive president of Sherpa Capital.
An almost taboo subject is capital increases. In Spain there have only been two defenses. Amadeus, which at the dawn of the crisis, in April, raised 1,500 million between new stocks and convertible bonds, and IAG, which successfully requested more than 2,700 million from the market in September. Cellnex raised 4,000 million in August but to grow.
The reduction of operating costs is essential to stay afloat
“The shareholder’s tendency is to go to the limit and continue to indebt the company, before opting for dilution or the entry of new players in the capital. Many of the companies that are asking SEPI for help are doing it more through loans than through capital inflows ”, reveals the Alvarez & Marsal director. But this will have to change shortly. There are not many options. “We are going to see capital increases in all sectors and especially in those that have been most affected by the crisis”, predicts Ignacio Marqués del Pecho, partner in charge of restructuring in Arcane. The fear of meager valuations and the dilutions they will cause are holding them back.
“There will be capital increases of a different nature. A large part of the companies have been undercapitalized and need new contributions of their own funds, either by their current shareholders or third-party investors, ”says the Linklaters expert. Investors, true, will look closely where they get. “The capital market will be very selective”, warns Ángel Martín, global head of restructuring of KPMG.