Spanish Market

The chairman of Spain’s Caja Madrid, the biggest shareholder in Iberia with 23 percent, said an agreement on a merger between the airline and British Airways was close.
“I believe the operation is close, that’s my impression” Miguel Blesa told journalists as he presented the unlisted bank’s 2008 results on Monday.
Blesa is also deputy chairman of Iberia.
When asked what was blocking a merger agreement, Blesa said the share split, corporate governance questions and the location of the combined group’s headquarters all needed to be resolved.
“The perception now I think is that the share exchange will not be 60-40” he said of the likely stakes to be held by BA and Iberia. “Iberia is now worth more. It will be closer to 55-45”
Caja Madrid said in a later statement that Blesa’s estimates for the share exchange were his own and not the bank’s.
British Airways Chief Executive Willie Walsh is expected in Madrid on Tuesday for talks with Iberia Chairman Fernando Conte and other Oneworld alliance bosses.
“The talks are ongoing, no timescales have been set” a BA spokeswoman told Reuters.
When the two announced last July they were discussing a merger, British Airways expected to secure around 65 percent of the combined group, but its shares have since plunged, worsened by a profit warning in January.
Together with the pound’s recent slide against the euro, Iberia’s market capitalization is now higher than BA’s.
Iberia’s shares closed up 1.66 percent at 1.84 euros after the announcement. BA lost 3.33 percent to 116 pence, although the airline also suffered due to massive travel disruption at Heathrow, its London hub.
BA cancelled all short-haul flights and long-haul journeys before 5 p.m. British time due to heavy snow. A spokesman said the weather also disrupted other airlines, and that disruption was likely to continue on Tuesday.

Spanish business leaders and politicians looking for bright spots amid the economic gloom can still take heart from the performance of the banking sector.
Unlike the US or the UK, all the country’s lenders are still intact, none has been recapitalized with state money and most are profitable. Spanish banks are conspicuous for their relative health.
This will change as Spain’s economic malaise deepens and bad debts related to the property crash take their toll.
Santander, the eurozone’s biggest bank by market capitalization, last week reported a 9.4 per cent rise in net profit for 2008 to €8.88bn ($11.4bn), in spite of a last-minute €500m pre-tax charge related to client losses on investments with alleged fraudster Bernard Madoff.
BBVA, the second-largest Spanish bank, disclosed a sharp fall in fourth-quarter profit but for the full year it reported a 0.2 per cent increase in recurrent net profit to €5.41bn.
La Caixa, the largest of the unlisted cajas, or savings banks, on Friday said recurring profits, which exclude one-off items, rose 2 per cent year-on-year to €2.05bn.
In all three cases, bottom-line growth might have been yet stronger but for quiet instructions from the Bank of Spain to limit profit growth – uncomfortable for political and prudential reasons in a deep economic crisis – by stepping up precautionary provisions on the 2008 accounts.
The Bank of Spain has been equally cautious about dividends, discreetly asking bank chiefs to curb payouts so that profits can be retained for strengthening the capital ratios that investors are so closely watching.
Such advice is typical of the Spanish regulator. Its conservative stance on off-balance sheet investments and insistence on counter-cyclical “generic” provisions saved Spain’s banks from the worst of the US subprime crisis and gave them a financial cushion they will need in the next two years.
Banco Popular, the third-biggest listed lender and among the most exposed to Spain’s struggling property developers, took the message to heart, setting aside an extra €189m in non-specific “voluntary” provisions in the final quarter.
Unveiling a 17 per cent fall in full-year profits on Friday, Angel Ron, the bank’s chairman, warned: “We need to be prepared for a crisis that may be longer and even worse than international organizations expect”.
Most private sector economists agree that Spanish gross domestic product will shrink by at least 2 per cent this year, adding 1m workers to the more than 3m already unemployed. Construction jobs were the first to go but other sectors in industry and services are feeling the pain.
Joblessness means loan defaults. Non-performing loans (NPLs) represent about 3.5 per cent of total bank credits and are rising fast. Few doubt the NPL ratio this year will hit 8 per cent, the level it reached during Spain’s last serious financial crisis in 1993.
Much of this rise will come from over-leveraged property developers and their struggling suppliers, and unemployed mortgage-holders and consumer finance borrowers, say bankers. Banks are becoming significant landlords as they swap developers’ debt for equity or assets.
For a country and a banking sector used to uninterrupted economic expansion and double-digit annual loan growth, the downturn will come as a shock.
“The people who experienced the 1993 crisis and managed it are no longer there,” says Ricardo Wehrhahn Amézaga, partner at consultants Roland Berger in Madrid. “You now see bank branch managers who are 27 years old.”
Analysts say the profitability and even the survival of banks and regional cajas (some will probably be forced to merge) will depend on their ability to make their generic bad loan provisions last till the crisis ends.
These provisions, built up during the good years and likened by the banks to core capital since they are not allocated to any specific bad loans, are substantial – more than €6bn in the case of Santander. Some banks, however, began drawing them down in the fourth quarter of last year.

Spanish construction companies are turning to operations abroad to beat the crisis. Companies like ACS, FCC, Acciona or Sacyr finished the year with a record number of foreign construction contracts on their books, totalling 12 million Euros, 9% more than the previous year.

According to Seopan, although 2009 has got off to a shaky start, there is a very succulent project on the horizon, namely the expansion of the Panama Canal, one of the biggest civil engineering construction projects in the world, valued at 3,800 million € which will be tendered for by the 4 major Spanish construction groups (ACS, FCC, Acciona and Sacyr via 2 different consortiums).

According to Seopan´s provisional information, the biggest companies in the sector avoided the 2008 crisis in the international market obtaining contracts worth a total of more than 12,000 million €, 9% more than in 2007, and managed to accumulate 4 consecutive financial years with record levels of foreign work contracts between 2005 and 2008,

If all types of contracts are included, the total turnover for business conducted outside Spain reached about 20,000 million €, half of which was accounted for by work being carried out from previous years` order books.

Seopan has pointed out that the 2008 crisis has had little impact on the international market since the major companies have maintained their presence in traditional markets and because the USA has been strong in all types of infrastructure contracts. Activity in Eastern Europe held up due to the European funds. Portugal has been boosted by its infrastructure plans and penetration of the Arab Emirates and Libyan markets. According to information at the close of 2007, 69% of contracts were in the EU, 15% in North America, 10% in Central and South America, 4% in the rest of Europe and 1 % in Asia and Africa respectively. Business owners are displaying caution for 2009  due to the uncertain response by governments in terms of their investment in infrastructure amid the economic crisis (the next American government has already announced its plan for this sector in order to reactivate the economy) and current financial turmoil.

However, the big construction companies have dismissed talk of problems in foreign turnover this year thanks to the work contracts pending in the order books from previous years.

The Spanish government’s rescue plans are being rolled out. First, it was the housing market’s guarantee scheme which would enable the property market to concentrate on the government subsidized housing programme (VPO); then the bank aid scheme, with a maximum of €150 million in guarantees and the purchase of assets, and now it’s the turn of the biggest companies in Spain, many of which are listed on the Ibex 35 index of the top companies in Spain.

After lengthy discussions between companies, groups affiliated to the socialist party and the CiU, an agreement has been reached: companies will be able to claim tax relief in Spain on the losses incurred from their subsidiaries abroad. This help will create a tax incentive for those companies which have been exposed to more risk - something which large, rather than medium-sized businesses, are encountering. The loss in value will be calculated “according to stake.”

This change will allow a modification in the Company Tax law article 12.3 in such a way that it allows for business losses for depreciation, as long as they are not listed on any market.

The relief will not be required to appear in the company´ s profit and loss account since the new accounting regulations prevent the inclusion of this type of item as allowance for depreciation in portfolio. However, the decrease in the value of the subsidiaries will be taken into consideration in the calculation of its value at the end of the financial year, “on the condition that it is approved by the competent organisms” which effectively makes it act as a control requirement.

The debate continues however, in the case of those losses incurred from depreciation through stakes in companies in countries or territory considered to be tax havens.

The point of contention is the fact that a lot of the subsidiaries which will trigger this mechanism are countries, for example, in Latin America, which cannot guarantee the control of depreciation in assets and which could use this as a means of justifying relief, something which is difficult to prove and control for the Spanish tax authorities.

According to CiU, the reform of the 2007 accounting law, on the adaptation of commercial accountancy legislation for international harmonization and its inclusion in the new General Accounting Plan, has generated a tax problem, which coupled with the present world economic recession has seriously affected the competitiveness and internationalisation of the biggest Spanish companies, and in the short term, their financial situation. 

The regulations concerning allowances for depreciation in subsidiaries and participant companies was modified in this accounting reform and the possibility of gaining relief through this type of allowance was invalidated through company taxation legislation Article 12.3.

The Increasing Importance of Foreign Trade

Foreign trade is an important source of income for Spanish businesses. According to the Bank of Spain Centre for Economic Balances, while net ordinary results for companies inside Spain is falling at a rate of 3.6%, the dividends received from mainly foreign subsidiaries account for approximately half the increase in financial income in the last 2 years.

Experts point out that in periods of deceleration in the Spanish economy, international activity becomes more important. The problem is, however, that the profound crisis is also being experienced abroad. According to the OECD (the Organization for Economic Cooperation and Development), the entire world is in recession. Thus, the modification means a breathing space for large companies whose activities abroad are feeling the pinch.

The government does not provide information on foreign subsidiary turnover, but the activity within the country gives us some idea of its importance. According to information from INE (The National Statistics Institute), foreign companies operating in Spanish territory generate almost 17% of the total turnover of businesses in the service sector, which represents two thirds of  Spanish GDP and more than 66%  total employment.

The biggest share capital increase operation in the history of the Spanish Stock Market is underway. Santander will issue new shares to the value of 7,200m€ which will be quoted on the Stock Market from the 4th December. The dilution effect of the operation on the earnings per share is not to the market’s liking and the value of Santander shares has dropped by 18.5% in 3 trading sessions.

From today and until the 27th November, Santander shareholders have the option of taking part in the share capital increase operation as preferential investors. The bank will issue 1,600 million new shares and those wishing to participate will be able to buy one new share for four old ones which have a discounted price of 4.5€. Those shareholders who decide not to participate will be able to sell their share rights on the market.
From today until 27th November, Santander’s shares and their share rights will have separate quotations. So, taking into account Santander’s shares closed yesterday at 6.8€, today they will start off the session at 6.34€, since the theoretical value, going on current prices of share rights of 0.46€, will automatically be deducted. The value of both share and share rights may rise or fall during the application period.

Santander hereby sets in motion the biggest share capital increase operation in the history of the Spanish Stock Market. In order to discover an operation of similar dimensions in which the issuer also paid in cash, we have to go back to Repsol´s share capital increase operation in July 1999 when the total raised amounted to 4,646m€.
The next biggest cash operations include the 3,447.8m€ which Mapfre raised in March 2007, the 3,374m€ by Iberdrola in June 2007 or the 2,9999.9m€ by BBVA in November 2006.

Likewise, the biggest non-monetary share capital increase operations in the history of the Stock Market have also been headed by Santander. The most important being in 1999 during the merger with Central Hispano when 14,271.2m€ were issued, while the second biggest occurred in November 2004 when 13,358m€ were raised to fund the purchase of Abbey.

Santander is back in the thick of it and this time with a guaranteed operation. The President, Emilio Botín, said yesterday that things were going extremely well and that the operation was a good thing for the bank and the shareholders.

The market, for the moment, has not taken it well and in three days the share has fallen 18% in value. Nicolas Lopez, Analytical Director at M&G Securities said “The price, more or less reflects the dilution effect on earnings per share - estimated to be between 15% - 20% - however the market has taken three days to take it in, so it is not known if, to a certain extent, this was expected or if it is due to the current situation”.

Other experts, including David Navarro of Inversis Bank, remind us that part of the fall is also an indication of the surprise which the news caused after the bank’s management team insisted there was no need to increase share capital at the end of October “The good thing is that we don’t foresee more Santander share capital increase operations.”

The most sophisticated humanoid robot in the world, which physically resembles a human being, and is designed in Japan, will hone its skills in Spain. The University has announced it will be programmed by experts from the Robotics Lab of the Carlos III University in Madrid to look after sick and disabled patients or move beds in hospitals. Two teams of scientists, one from Spain and one from Japan, working in close collaboration in a joint research laboratory with centres in both countries, are providing the training for the robot, named HRP2, which will equip it to carry out domestic, social, health, space, surveillance and aid missions amongst others.
The decision to locate in Spain (the robot is not being marketed outside Japan) is the result of an ambitious agreement signed during the recent visit to Japan last week, by the King of Spain who was accompanied by the Minister for Science and Innovation, Cristina Garmendia, to formalize the development of several joint research projects.

The robot’s body has a human appearance, 1.60m tall and weighing 50kgs (batteries included) with a thin outer casing to hide its sophisticated innards. It also has arms, hands, legs and a head with a total freedom level of 32 degrees - the technical specification for the type of movement of his joints.

The Future.

Montserrrat Torné, Head of the Ministry for Science and Innovation’s department for International Cooperation and Carlos Balaguer, Vice-Rector for Research at the Juan Carlos III University disclosed to the Efe news agency that the robot is due to arrive in Spain next summer and to be functioning for next October, although we’ll have to wait until 2010 until HRP2 is fully operational.

For the third year running, Spain leads the European table for the supreme award in ecological certification.

The ISO 14001 continues to be the seal of approval which assures company policy on commitment to the environment. There were no big surprises for Spain in this year’s annual list, published last week by The International Standards Organization which awards the certificates to each country. Spain continues leading Europe for the third consecutive year with a total of 13,852 certificates, 24.5% more than the previous year, widening the gap with Italy, which has the second most ecological companies in Europe.
Worldwide, Spanish businesses rank third in the list which is led by China (30,489) – a country which does not exactly ascribe a great deal of importance to ecological issues.

There are other green certificates in existence such as the C02 emissions compensatory scheme.

Some experts see the 14001 as a minimum requirement for companies.

The EMAS.

Experts consider ISO 14001 to be the minimum guarantee of environmental standards, although it continues to dominate the stamps of approval for quality in this field. “Several years ago, Europe launched the EMAS (Eco-management and Audit Scheme) regulations with the intention of substituting 14001. Although it was very successful in the beginning, only 10 – 15 % of companies now apply for it”, said Jose Angel Guerra, of the environmental division of the consultancy and certification company SGS.

AENOR (Spanish Standards and Certification Association), the institution which awards most ISO certificates in Spain, highlights the service and construction sectors as those where most environmental management certificates are awarded, followed by the chemical, oil and automotive sectors.

ISO 14001, with its more than 150,000 certificates in 148 different countries continues to symbolize an advantage for all those businesses competing in state or multinational company tenders. “Public administration services are putting more and more emphasis on the requirement of environmental certification in contract bidding. And this is not limited to 14001. The government has announced that companies with energy efficiency certification will have priority in tenders for public sector contracts”, said Jaime Fontanals, New Products Director at AENOR.

Green stamps are becoming more and more sought after and companies are demanding certification which values particular aspects of their activity. In response to this demand, AENOR has just launched its compensatory carbon dioxide emissions certificate applicable to events, companies, products, services, transport and buildings. The International Oil Congress held in Madrid this summer, and the International Pharmaceutical Congress held at the end of October, have been the first to adopt it.

Caja Madrid has decided to ramp up its presence in Indra. Over the last few weeks, the Madrid bank has been buying up small packages in the company and now owns 5% more than before. In its newest purchases, it has invested approximately 122 m€. The bank now owns 20 %of the technology company and is the major shareholder.

Despite the political mess in the Boardroom at Caja Madrid, involving those in favour of the renewal of the bank’s governing bodies -approved last week in the general meeting- and those who prefer to delay the renewal, the bank is trying to carry on with its normal day to day business

The Madrid bank has taken advantage of the fall in the Stock Market in the last few weeks to increase its stake in Indra. It has been buying small packages in the technology company which amount to an investment of 122m€ and have increased their stake in the company by 4.7 % with an average share value of 16.3€.

The financial institution is, once again, the major shareholder in Indra with 19.70% of its capital. Next comes Unión Fenosa, which controls just over 15%, followed by Casa Grande de Cartagena, the company in the Del Pino family holding company with 5.68% and Cajastur with 5%. Caja Madrid ´s new investments have been driven by the attractive share price of the company which is presided by Javier Monzón.
Caja Madrid has owned approximately the same proportion of Indra since May 2005, when its share increased from 10.04% to 14.99%. The Madrid bank first bought into the technology company in 1999 and since then profits stand at 20%. Yesterday, Indra´s shares closed at 16.13€, a slide of 3.18%. However, reports from analysts from the bank rate its value between 21€ and 25€ per share. The price of the share has fallen by 13.19% since the beginning of the year.

The Bank of Spain has cautiously acknowledged praise of its supervisory model in the banking system, but is preferring to keep out of the limelight whilst the global financial system undergoes reform. The caution which characterizes the Spanish supervisory banking model has made it one of the big winners in the financial crisis. Authoritative institutions like the American Wall Street Journal, the British Financial Times or Mervyn King, the governor of the Bank of England, have established it as an objective for the rest of the central banks to achieve.

However, this starring role has contrasted considerably with the low public profile of the Bank of Spain and its governor, Miguel Ángel Fernández Ordóñez, in the reform process of the international financial system, which the G-20 group formally initiated last weekend – a situation that does not only apply to the Spanish governor. Of the central bankers from other the member states of the European Union, only Mario Draghi, the governor of the Bank of Italy, has participated directly in the meeting and that has been in his capacity as President of the Forum for Financial Stability, the organism which is drawing up the bulk of the reforms to the system.

Having said that, however, no other central bank from the euro-zone has received the congratulations that Spain has, whether it be for its anti-cyclical policy – which amounts to nothing more than the creation of a cushion in times of prosperity in order be able to ride out the storm in times of hardship- or whether it is because Spain forbade investment in off- balance sheet vehicles.

Spain´s absence from the headlines does not mean to say that it is not involved in the inner mechanisms of such important negotiations. In the run up to the G-20 meeting, the Bank of Spain held meetings with the Spanish government to prepare Spain’s role and its proposals in the handling of the crisis.

Apart from contacts with other supervisory bodies and market agents requesting information about Bank of Spain practices, the bank is also involved in other organisms and forums such as the Bank for International Settlements and the Basle Committee, is working in conjunction with the rest of the supervisory bodies and is ready to offer advice gleaned from their experience in previous Spanish banking crises, especially those in the late seventies/early eighties and the early nineties.

Nobody would deny that this discreet stance of working on the nuts and bolts of the system instead of grabbing the headlines is an essential function of any central bank and its governor. The experience of the Spanish supervisor in banking crises has been much more recent than that of central banks in other countries and has probably increased the dose of caution being administered inside the bank. Although the Spanish banks have come through the first wave of the financial crisis (high risk assets (sub-prime) and structured products) with flying colours, it remains to be seen how it will cope with the second onslaught, which is facing up to how the real economy reacts.

The Spanish economy is on the road to recession; unemployment is heading towards 17%, the property market is in rapid decline, the trickle of credit continues and the level of bank defaults is rising rapidly. Added to all that, loans to the property sector amount to over 300,000 m€. Without doubt, the Spanish banks and their overseer have won the first battle in the financial crisis but the real economy has issued an all-out declaration of war.

In the midst of a liquidity crisis which is threatening to engulf small and medium-sized businesses, Caja Madrid is granting 2,250m € under preferential conditions to help pay wage bills, social security, rent and supplies. Additionally, it will offer credit for investments with a two year grace period.

Small business owners who are finding themselves choked by a lack of liquidity and are having difficulties obtaining credit to finance their daily activities will be able tap into the new credit facilities which are soon to be offered by Caja Madrid. The bank has decided not to with hold credit to small and medium-sized businesses and has assigned part of the 13,000m€ it has in liquid funds to help them.

According to sources close to the operation, the scheme will initially be rolled out in Madrid, but could be extended to other regions. It will provide 2,250m € for investment projects, working capital, internationalization and job creation. 2,000m € of the total amount which Caja Madrid is pouring into the programme will go to financing investment projects as well as the day-to-day running of businesses. According to yesterday’s edition of Cinco Días, the latter is a new scheme which the Official Credit Institute (pending approval from the Ministry for the Economy) intends to copy.

The bank will set up a specific credit account called the Basic Business Credit Account which will grant an amount equivalent to quarterly expenditure on wage bills, social security, tax, supplies and rents with an upper limit of 1m€ per company. The business will be charged the Euribor 6 month interest rate plus 1.0% with an account opening commission fee of 0.25%.

The businesses will additionally be able to take advantage of loans for investment projects, with preferential conditions, of up to 2m €. The most important feature of the lending facility is that the business will have a 2 year grace period during which it will only have to pay the interest on the loan, thus allowing the company to ride out the worst of the crisis. If the project is related to Research and Development and Innovation, there will be no account opening commission fee.

Caja Madrid will also provide 200m € more for international expansion projects and a further 50m€ for employing members of socially disadvantaged groups (the long-term unemployed, the handicapped and working women with difficult family circumstances.) Caja Madrid hopes that this scheme will increase their share of the market in the small and medium-sized businesses sector which stands at 15% on a national level with 18,000 customers and 43% in Madrid after opening to them 3 years ago.