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Western EuropeOctober 5 2008

Easy credit blows away

Portugal’s businesses have had to adjust to the financial climate change as the credit crunch makes itself felt, leaving simple funding a thing of the past. Writer Peter Wise.
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In Portugal, as in many other ­countries, the global credit crunch has transformed funding from an everyday to a strategic activity.

“Before the crisis, companies would decide on their expansion policies and then simply call up their bankers and tell them how much they needed to raise,” says Paulo Gray, Citigroup’s country officer in Portugal. “Credit was readily available and the leading Portuguese groups tapped the wholesale market directly for most of their financing. It was a routine matter that ­didn’t require a great deal of attention from chief financial officers.”

Since August 2007, that climate of easy credit has changed dramatically. “Funding is now a key strategic issue and the direct concern of chief executives and CFOs,” says Mr Gray.

As spreads soared and liquidity dried up, companies that recently took the easy availability of credit for granted have had to adapt to making painstaking preparations for debt issues, carefully sounding out investors beforehand, disclosing more information and organising more detailed roadshows.

Alternative energy

“The new climate requires companies to be imaginative, flexible and diligent,” says Mr Gray, who is also head of Citigroup’s fixed income operations in Portugal and Spain and its senior government banker for Portugal.

In general, Portuguese companies have responded successfully to the new challenges. In September 2007, for example, soon after the onset of the subprime crisis, Energias de Portugal (EdP), the country’s dominant power utility, succeeded in raising $2bn in the US at maturities of five and 10 years to finance its $2.9bn cash purchase of Horizon Wind Energy, a leading US utility, in one of the world’s biggest renewable energy deals to date.

In recent years, Portuguese companies have been tapping capital markets to fund extensive overseas expansion to overcome the limitations on growth in a small domestic market where economic growth has been sluggish. The process is continuing. The steel construction and energy group Martifer, for example, is acquiring 55% of Ventania, a Brazilian wind energy company, for €6.9m and has expressed interest in buying a 25% stake in a €1.7bn wind power project in Australia. The acquisitions are part of an internationalisation process that has already involved acquisitions in Germany, Poland, Romania, Spain and the US.

Equity fall

However, the liquidity squeeze is forcing some companies to reappraise or postpone expansion plans.

“The overall leverage of the economy has been decreasing and companies are exercising more caution in terms of acquisitions, expansion and overseas growth,” says Diogo Lacerda, head of fixed income with Millennium investment banking, part of Portugal’s biggest listed banking group. But for companies with good credit histories and solid growth stories, says Mr Gray, “the market is there for them”.

The fall in equity prices has also created overseas growth opportunities, particularly in neighbouring Spain. “Before the subprime crisis and the bursting of the real estate bubble hit the Spanish economy, Spanish companies were valued at premiums that made them inaccessible to most Portuguese groups,” says Luís Luna Vaz, managing director of Espírito Santo Investment, part of Portugal’s third largest banking group. “Now many Spanish companies are at a much more attractive level.”

Caixa – Banco de Investimento, the investment banking arm of state-owned Caixa Geral de Depósitos, Portugal’s largest financial group by deposits, is working actively to help Portuguese companies expand in Spain through mergers and acquisitions (M&As), says chief executive Luís Laranjo. “Spain is Portugal’s biggest export market and the downturn there will inevitably have a negative effect on the Portuguese economy. But it also makes the acquisition price of Spanish companies more accessible.”

“This could be an opportunity for Portuguese companies to get a better hold on the Spanish market,” says Miguel Athayde Marques, chairman and chief executive of Euronext Lisbon, the Portuguese stock market.

“The flow of investment has always been strongly in Spain’s favour and the overseas expansion of Portuguese companies has often bypassed Spain, focusing on Brazil, Africa, eastern Europe and the US. Now is perhaps a good time to start looking more carefully at Spain.”

Merger boom

Companies who have been doing just that include the distribution unit of Sonae, Portugal’s biggest conglomerate, which recently agreed to buy nine retail outlets in Spain belonging to Boulanger España for an enterprise value of about €25m, and EdP, which in September acquired Spanish natural gas distributor Gas Merida for €15m.

Portugal has been no exception to the general fall in equity prices. The PSI 20, the main share index, has fallen approximately 35% this year, after five years of being among the best-performing indeces in Europe. In the first half of 2008, trading volume fell by 36%, although the number of transactions increased by 35%.

“The fall in volume is essentially a reflection of the drop in the market capitalisation of companies due to lower share prices,” says Mr Athayde Marques. “In a sense we are paying the price for very high consistent growth in previous years.”

Lower share prices appear to have breathed new energy into M&A activity in Portugal. In the first seven months of this year, deals totalled €7.4bn, the highest level since 2000. Bankers say that despite a lack of large-scale deals, weak shares price are encouraging investors to increase equity stakes.

Portugal’s corporate debt market is focused on big utilities such as EdP, Portugal Telecom, Galp Energia, the leading oil and gas company, and Brisa, one of Europe’s biggest toll motorway operators, which have gained an international profile as a result of privatisation. State-owned groups such as railway company CP-Caminhos de Ferro Portugueses; rail-track operator Refer; ­Metropolitano de Lisboa, the underground rail service; and Parpública, the state holding company, are also big issuers.

But the overwhelming majority of Portuguese firms lack the dimension to issue debt directly on the international market.

“The average size of Portuguese companies is small and only a few have international ratings,” says Manuel Preto, finance director of Santander Totta, one of Portugal’s top four listed banks. “This means smaller companies are not able to take advantage of direct funding from a wholesale market where it can currently be considerably cheaper for companies to finance themselves than banks.”

Mr Lacerda says: “Portuguese companies are not as dependent on capital markets as they are in countries like the UK or the US. The situation here is more in line with France and Germany where companies rely more on direct links with banks and balance sheet financing as their main source of funding.”

In a climate where the cost of bank credit has soared and availability diminished, more Portuguese companies may be encouraged to seek stock market listings. “This may not be the most appropriate time for initial public offerings,” says Mr Athayde Marques. “But it is the right time for companies to prepare for future IPOs. Otherwise they will not be ready to seize the opportunity when the market recovers.”

There have been three new listings on Euronext Lisbon this year and others are in the pipeline. EdP raised €1.8bn from an offering of 25% its renewable energy arm, EDP Renováveis, in Europe’s biggest IPO this year to date. Citigroup, Morgan Stanley and UBS were joint global co-ordinators and book-runners together with the investment banking arms of Banco Espírito Santo, Millennium BCP and CGD.

But the current liquidity squeeze has increased the hurdle size for most Portuguese companies considering tapping the equity market. “Investors are more willing to play less liquid assets in bull markets when liquidity is not such an issue,” says Mr Luna Vaz. “But an IPO, for example, of 25% of a company that is only worth a total of €200m is very small for an investment community that is increasingly thinking in pan-­European terms.”

Self-funding

While they wait for market conditions to improve, Portugal’s big issuers are funding themselves to a larger extent from cashflow and own resources. But they still remain active in the wholesale debt market. In addition to senior and subordinated debt, they are making greater use in today’s more restrictive climate of bilateral and syndicated loans with maturities of three to five years. Floating-rate notes with similar maturities are common in the private sector and commercial paper programmes are widely used by companies of all sizes.

Portugal Telecom is in the market to finance a €2.1bn share buyback programme that it launched last year in an effort to win shareholder allegiance as it successfully fought off a takeover bid by Sonaecom, a smaller Portuguese competitor. Over the long-term, Galp Energia will be raising finance for large-scale upstream exploration and prospecting investments.

Toll motorway operator Brisa is focusing on project finance funding for specific operations. It has recently been shortlisted for a road concession in Florida known as Alligator Alley that involves the privatisation of 125 kilometres of highway. The company is also expected to bid for more new concessions abroad, including two motorways in Russia in partnership with natural gas giant Gazprom, and a highway construction tender in Turkey.

TAP-Air Portugal, the national airline, has recently spent €460m on six new airplanes as a part of a plan to expand routes and flight numbers, particularly to Brazil and Africa. TAP, whose profits more than tripled last year to €32.8m, uses its planes as collateral to finance debt.

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