Spain Braces for Surge in Insolvencies as Pandemic Hits

(Bloomberg) --

Spanish bankers and lawyers are bracing for a steep surge in insolvencies, amid the country’s rising death toll and strict lockdown measures.

In an attempt to offset the economic cost, Prime Minister Pedro Sanchez last month announced a 117 billion euros ($128 billion) fiscal stimulus, but some business leaders say aspects of the government’s response risk making things worse.

All those who work in non-essential services must remain at home over Easter, but the government says that companies must pay employees in full during that time. The effective ban on firing or temporarily laying off staff could force companies that suddenly find themselves with no revenue to close, Antonio Garamendi, chairman of the Spanish Business Associations Confederation said earlier this week.

“That measure clearly goes against the liquidity position of companies,” Angel Martin, KPMG’s head of global financial restructuring, said. “It could have direct repercussions for their viability, generating a bigger problem for their employees in the mid-term.”

A big chunk of the government’s efforts to support the economy is directed at small and medium-sized companies, which represented 65% of jobs in the country as of February, according to data published by the Ministry of Industry, Commerce and Tourism. The resurgence in smaller companies’ demand for capital in recent years also made Spain a hot spot for private debt funds.

While there are as yet no estimates as to how many companies may be at risk, Rafael Domenech, head of economic analysis at BBVA Research, estimates that the economy as a whole will shrink between 0.6% to 4.5% this year.

“Everything points to a substantial increase in insolvency proceedings,” said Jordi Gras, a Barcelona-based partner at EY Abogados who specializes in corporate restructurings and insolvencies. “Bankruptcies seem unavoidable after three weeks of slowdown, if not a complete halt, in economic activity for many companies and no clear visibility on when the restrictions will end.”

Containment Costs

The initial impact of containment measures could amount to almost 30% of Spain’s gross domestic product, according to estimates from the Organization for Economic Co-operation and Development. The group of rich nations forecasts that for each month of containment, there will be a loss of 2 percentage points in annual GDP growth on average for each country analyzed.

The global tourism sector alone faces an output drop as high as 70%, the OECD said. In 2018, that industry accounted for 12% of Spanish GDP and 13% of the country’s jobs, according to the National Statistics Institute.

Spain’s high-yield borrowers, who pay higher coupons to investors to compensate for the additional risk they take, are already feeling the pain. Gaming companies Cirsa and Codere, ferry operator Naviera Armas, bridal gown designer and retailer Pronovias and autoparts manufacturer Grupo Antolin have all seen their credit rating cut in recent weeks, while department store El Corte Ingles and NH Hotels have been put on negative watch in line for a potential downgrade.

Legal Standstill

The steps taken under the government’s state of emergency have caused a legal standstill, delaying a surge in insolvencies for now, Angel Alonso, a partner in the restructuring department of law firm Uria Menendez, said by phone.

Spain did learn some lessons from its last crisis in terms of how to deal with insolvencies. For example, a court now no longer needs to grant authorization for urgent steps to protect cash or measures aimed at selling off goods for a fair price.

“After several reforms, the bankruptcy and insolvency law we have is better than it was 15 years ago,” said Juan Verdugo, restructuring partner at Garrigues, by phone. “But the courts specializing in insolvencies and restructurings still lack material resources.”

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