Lehman,others pick up bargains in Spain's frail economy

LONDON (Reuters) - Lehman Brothers LEH.N and other investment banks, private equity firms and hedge funds are queuing up to buy distressed Spanish assets as the steep economic slowdown offers investors big discounts.

Lehman has purchased stakes in distressed senior bank debt, law firm Ashurst said recently, providing a rare glimpse of insight into the normally secretive world of distressed transactions.

The U.S. bank also bought stakes in a defaulted senior bank debt agreement, Ashurst said in a brochure on distressed transactions, in which investors take on parts from troubled companies at a discount, hoping for a profit.

Such deals -- not normally disclosed by banks wary to show their positions -- include the purchase by U.S. private equity firm Apollo of a portfolio of receivables from savings bank Caixa Galicia and Banco Popular (POP.MC), according to Ashurst.

"We expect more non-performing loan sales to follow," Jose Christian Bertram, a partner at Ashurst, recently said at a presentation to investors about Spain's distressed market in London last week.

In another example, U.S. investor Carval, with $17 billion in assets, bought a portfolio of receivables from Spanish bank BBVA (BBVA.MC) worth 720 million euros ($1.13 billion), according to Ashurst.

Lehman, Apollo and Carval all declined to comment.

SPAIN HOTBED

Spain has become the centre of focus for Europe's restructuring bankers, such as Rothschild, Lazard, Houlihan Lokey, Goldman Sachs (GS.N) and Cyrus, keen for their business to pick up after years of dearth in distressed deals.

"We think Spain is going to be a very interesting market for opportunistic players," said Antoine de Cockborne, an associate at City Property Investors.

"This is the start of a very difficult situation, it will hit the bottom, we're looking for discounted assets."

The economy is faltering after a decade-long boom that saw house prices almost triple. Spaniards who borrowed against the rising value of their homes to buy cars and second homes are now struggling to pay their bills.

The global credit crunch and record oil and food prices are pressuring Spanish consumers, now tightening their belts and forcing local shops to close down. Empty stores with "for sale" signs have become a common view around the country.

Distressed debt investors are also looking at firms such as Cortefiel, a high street clothing retailer bought by private equity firms PAI Partners, CVC and Permira in 2005. Its debt trades at about 50 cents per dollar.

Retailers and service providers face tough times as customers leave unpaid bills, giving distressed investors opportunities as they may buy the bills for up to 90 percent discount to their face value, offering those who risk to chase the customers an attractive yield.

Bank of America (BAC.N) and WestLB bought a portfolio of receivables from Vodafone in Spain worth 190 million euros, according to Ashurst.

PROBLEMS

But chasing assets in Spain can be harder than investors think as servicers -- agents in charge of recovering debts -- are not as sophisticated as in other countries, said Juan Hormaechea, a partner at Ashurst.

"The services market in Spain is underdeveloped, they are slow and not used to mortgages," Hormaechea said. "Some buyers buy portfolios without knowing that the servicer will become the bottle neck."

Apollo, which owns a portfolio of about 500 flats along the Mediterranean coast, is battling with local utility and council bills, and unpaid mortgages, a person familiar with the situation said.

And the price is another barrier, as distressed assets may still have to fall further for the billions recently raised for distressed funds to invest in Spain.

"At the moment, we have more sellers than buyers," said Bertram.

(With additional reporting by Jane Barrett in Madrid)