Sacyr's debt levels worry, fears of fire sales

MADRID (Reuters) - Investors fear Spanish builder Sacyr Vallehermoso SVO.MC could be forced into fire sales as time drags on and it fails to find buyers for assets it has put on the block to cover its massive debts.

D. Luis Fernando del Rivero Asensio (R), Chairman of Sacyr Vallehermoso, and D. Manuel Manrique Cecilia, Vice Chairman and Managing Director of Sacyr Vallehermoso, address the media during a news conference in Paris, April 19, 2007. REUTERS/Benoit Tessier

Sacyr’s share price has lost 69 percent of its value since the beginning of the year as worries about borrowing levels nag, compared to a 39-percent slump in Spain’s blue chip index.

“We continue to see material downside risks in the near term for Sacyr -- mainly linked to its high gearing,” said Goldman Sachs in a recent research note.

Like many Spanish builders, Sacyr borrowed heavily over the past few years to diversify away from residential property at the end of a nine-year-long domestic housing boom.

Net debt was 18.3 billion euros at end-June, eight times market value. The ratio of net debt to net equity was 5.3, outweighing peers like Ferrovial FER.MC at 3.9 and ACS ACS.MC at 1.2.

Sacyr said on September 12 it would consider putting assets up for sale, including toll road unit Itinere ITIE.MC and 20 percent of oil major Repsol YPF REP.MC, to pay down debts.

But no firm expressions of interest have materialized and sources say the prices asked are too high. Getting good prices for assets is hard in a bear market with limited bank credit available for potential buyers said one fund manager.

“The ultimate price they are going to get in this kind of market is going to be a much lower price than they would have hoped for. So the ultimate improvement on their balance sheet is much less,” said Rupert Morrell at Premier Asset Management.

Around 347 million euros ($444 million) of debt matures in the second half of 2008, which Sacyr has refinanced. But 2 billion euros expire in 2009, pressuring asset sales.

“We estimate that Sacyr would have to sell assets to balance its cash flows in 2009, since ... its cash flow generation is insufficient to satisfy the 2.057 billion euros that expires that year,” said Ibersecurities analyst Ignacio Romero.

Sacyr said on Friday it will cover debt next year by renegotiation, housing sales, dividend payments and a possible sale of Itinere.

A source familiar with the matter said Sacyr is talking to a Citi infrastructure fund regarding a possible sale of Itinere. Citi has repeatedly declined to comment on the matter.

Sacyr on Friday declined to comment on any details of the asset sales process.


Press reports and analysts say the asking price for Itinere is 3.9 billion euros plus debt, 400 million greater than the value of Itinere’s failed initial public offering in April.

“They were unable to do an IPO at 3.5 billion euros and four months later they want to sell it for 3.9 billion? It’s a joke,” said an analyst at a major bank who asked not to be named.

The asking price is one of the main stumbling blocks to a potential Citi deal, the source familiar with the talks said. Also key are clauses in existing Itinere loans that require a renegotiation of terms if it changes ownership.

“It makes things much more complicated and will put a downward pressure on the price,” the source said.

One banker advising a potential bidder for the stake in oil major Repsol said that sale had also stalled because Sacyr’s price was too high.

Another strain on Sacyr’s share price is the performance of Repsol, in which Sacyr has a 20 percent stake.

The 5.1 billion euro bank loan which partially funded the stake’s purchase was guaranteed with Repsol shares. When Repsol’s share price falls, Sacyr must stump up more guarantees.

Shares in Repsol fell as much as 20 percent on October 22 on concerns over its exposure to Argentina. The stock has since regained some ground to trade at around 15 euros, but still trades way below the 26.7 euros a share Sacyr paid in 2006.

“The Repsol situation is crucial. Repsol has touched an absolutely critical position in the last few days,” said another Madrid-based analyst, who declined to be named.

Sacyr has pledged 40 percent of its rental property business Testa as collateral for debt taken out to buy the Repsol stake.

Goldman Sachs suggested in a recent note that as long as Repsol’s share price remains above 12.9 euros per share, Testa will cover the collateral under current terms.

If Testa shares are no longer sufficient, Sacyr will have to reconvene with banks to discuss alternative collateral.

Analysts are agreed the longer it takes to sell assets to shore up its balance sheet, the more worrying Sacyr’s borrowing levels become and the greater the risk of fire sales.

“We see risk of ... fire sales,” said Ignacio Romero of Ibersecurities.

Editing by Hans Peters