ECM pipeline builds as Spanish confidence grows

Spanish equity markets are on a roll. The country’s benchmark Ibex 35 stock index has risen 14% in 2017, compared with a 6% rise on the Europe-wide Euro Stoxx 50. As Spain gets set to log three straight years of gross domestic product growth above 3%, investors like what they see and are piling in.

However, given the positive sentiment around Spanish companies, equity capital markets (ECM) have been relatively subdued, with just four initial public offerings (IPOs) in the first half of 2017, compared with seven in the same period in 2016 and 10 in 2015. One possible reason is that as banks have repaired balance sheets the loan market has recovered, increasing choice when it comes to options for funding.

Nevertheless, the IPO pipeline is building, bankers say, as investors look to divest themselves of assets picked up during Spain’s 'great recession' from 2008 to 2015, and equity sales seen so far in 2017 reflect that trend.

“These investments that were bought at the bottom of the crisis are now maturing, and home building is recovering, and with that in mind it makes sense to tap public investors,” says Jose Manuel Gomez-Borrero, head of ECM at Spanish lender BBVA. “We expect a number of other players to do the same in the coming quarters.”

Property matters

Spain’s property market was a key driver of the country's recent economic downturn, which saw the banking system in crisis and the government apply for a €100bn rescue package funded by the European Stability Mechanism. Spanish property prices doubled from 1996 to 2007, at which point about one in seven workers was employed in the construction industry. The subsequent crash saw average residential prices nearly halve and the unemployment rate rise as high as 26%.

The catalyst for change came in 2012, with the bailout and recapitalisation of the banking system, and the transfer of distressed property loans to Sareb, a newly formed bad bank. Investors subsequently started to regain trust in the banking system, balance sheets were cleaned up, bad loan ratios fell and loan loss provisions started to decline.

However, banks continued to hold large amounts of real estate assets on their balance sheets and, as the economy has improved, they have taken action to sell them off. Among recent deals, US-based Bain Capital Credit bought $489m of real estate loans from Banco Ibercaja, and private equity firm Blackstone bought a 3500-strong property portfolio from BBVA with a face value of about €175m.

"There are very attractive assets to divest, but sellers are frequently finding that valuations can be slightly higher in the private markets than in the public ones given the huge amount of liquidity and relative low cost of capital of private equity investors,” says Mr Gomez-Borrero.

Going public

One deal to have hit the public markets was an IPO for Neinor Homes, bought by Dallas-based Loan Star Funds for €930m in 2014 from Kutxabank. The IPO in March was priced at €16.46 per share, valuing the company at €1.3bn. The listing was the first of a residential home builder in more than 10 years, and the oversubscribed shares jumped 9% on the first day of trading.

A company likely to come to market, say bankers, is Metrovacesa, Spain’s largest property group by assets after a merger in 2016 with rival Merlin Properties. Metrovacesa is owned by Banco Santander and BBVA. Banco Popular, which failed in June and was bought by Santander for €1, also had a stake. The Metrovacesa deal is seen as a likely bellwether for other financial-backed property companies such as Aedas Homes, controlled by private equity firm Castlelake, and Via Celere, part owned by investment fund Varde Partners.

Aernnova, which manufacturers aeroplane parts and is owned by its management and venture capital firm Springwater Capital, and mining equipment company Maxam, in which private equity group Advent has a stake, are private equity targets, bankers say, with US private equity groups seen as the most likely buyers because European assets are generally still cheaper than their US peers.

Banking confidence

Away from the real estate pipeline, financial institutions are in focus, in particular Bankia, Spain’s fourth largest bank, which was formed in 2010 from the consolidation of seven savings banks and rescued by the government after collapsing in 2012. The government sold a 7.5% stake in Bankia in 2014 and a further sale is likely later in 2017, economy minister Luis de Guindos told the Spanish press in July. In June, Bankia approved a merger with mid-sized bank BMN, which is also partially state owned.

The only financial IPO so far in 2017 has come from Unicaja Banco, which raised about €688m in June. Coming in the wake of Banco Popular’s demise earlier that month, Unicaja priced the sale of 40.3% of its equity at €1.10 per share, the low end of the indicated range. However, driven by demand for Spanish assets, the stock in late July was trading at €1.21.

"The transaction shows equity investors’ confidence towards Spanish domestic banks and a desire to obtain exposure to Spain's current strong economic recovery and outlook," says Manuel Esteve, co-head of Europe, the Middle East and Africa, equity solutions, at JPMorgan.

One of the biggest capital market deals in 2017 has been Santander’s €7bn rights issue to fund the acquisition of Banco Popular, launched in early July. The issue was fully underwritten and allowed shareholders to subscribe for one share for every 10 they already owned at a price of €4.85 per share, a discount of 17.7% to the theoretical ex-rights price (TERP) – notably small compared with peers that have launched rights issues this year. For example, UniCredit sold stock in February at a 38%, while a UniCredit rights offering in April was priced at a 26% discount. Meanwhile, an $8.6bn rights issue from Deutsche Bank in March was offered at a 35% discount.

“The issue came at one of the lowest discounts to TERP and the share price actually rose during the rights issue period, which is a strong sign of investor confidence,” says Iñigo Gaytan de Ayala, global head of ECM at Santander. “Perhaps one of the reasons was that our deal was mergers and acquisitions [M&A] related, and investors saw the Banco Popular deal as positive for our market share, while the other three bank rights issues this year were for the purposes of balance sheet repair.” According to Spanish press reports in late July, the rights issue was 8.2 times over-subscribed.

Cashing in 

One of the largest IPOs in Europe this year came from Spanish auto parts maker Gestamp, which listed 27% of its shares on the Madrid Stock Exchange in early April, giving the family-owned company a market value of €3.2bn. This followed a listing, in late March, of Prosegur Cash, which raised about €750m for 25% of its share capital. 

“Prosegur Cash is in the business of transporting cash and there was an interesting debate leading up to the IPO over the future of the cash economy,” says Mr Gaytan de Ayala. “In fact, the shares are now trading about 15% higher than their launch price, so I guess it shows investors believe there is a future for cash after all.”

Spanish equity markets have seen €14.6bn of ECM deals in 2017 up to early August, according to data provider Dealogic, comprising €3.5bn of IPOs and €11.1bn of follow-on sales of equity. That compares to a total of €7bn across the two in 2016.

M&A optimism

With the country's economy growing strongly, M&A activity is on the rise and Spanish companies accounted for 14% of EMEA volumes in the seven months to the end of July, compared with an historical average of about 6%. Among notable deals, Cellnex Telecom agreed to buy 1800 towers from France’s Bouygues Telecom for €500m, and Santalucia agreed to acquire Aviva Vida y Pensiones and a 50% stake in Caja Espana Vida and Unicorp Vida from Avica Pls for €446m.

Overall deal activity in Spain jumped by 157% to $53bn in the first six months of 2017, compared with the same period in 2016, and while most of the deals were financed with bank debt, the rise in mergers offers the prospect of more capital markets activity down the road.

“We have worked on a number of mergers and acquisitions and they were all funded through bank debt, but it’s another factor that sets up the possibility of more IPOs,” says Ramiro Mato, country head for Spain at BNP Paribas. “It’s a very busy time in Spain and with strong growth set to continue we expect a lot of activity in the months ahead.”