Spain's Distressed Economy Offers Bargains to Investors

Five years after the fiscal crisis, there's still plenty of economic pain in Spain. But some law firms see opportunity, too.

, Focus Europe

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You'd think White & Case might be a little leery of opening new offices, considering the dozens of lawyers the firm has shed over the past several years. You'd also think the firm might not want to set up shop in economic trouble spots—and especially not in certain southern European countries still dealing with the fallout from the global financial crisis and a catastrophic real estate collapse. Spain, for instance.

So the new office that White & Case opened in Madrid in March raises the question: What in the world are they doing?

Even Oliver Brettle, a London-based partner who sits on White & Case's executive committee, acknowledges that the Madrid outpost is something of a gamble. Still, in spite of Spain's acute problems—which include a recent near-collapse of the banking system and an unemployment rate of 26 percent—he believes it's a solid bet. "We obviously assessed the opportunities and the risks," says Brettle, who notes that the firm had been considering opening in Spain for the past decade. "We thought that this was the right time."

White & Case isn't the only firm that's been placing bets on the Spanish market lately. This past May, Clyde & Co, a London-based firm specializing in insurance law, launched in Spain after luring away a nine-lawyer group, including four partners, from the Madrid office of insurance practice rival DAC Beachcroft. Meanwhile, more established players in the market—including Baker & McKenzie, Linklaters, Allen & Overy, and Herbert Smith Freehills—also have been beefing up their Spanish outposts in hopes of a surge of new work.

Certainly, Spain's economy appears to be stabilizing. Not only have the most apocalyptic predictions about the country's future not panned out, but for the first time since early 2011 the country's latest gross domestic product data actually showed positive growth, meaning the economy, at least technically, is out of recession. (Granted, the growth rate was a mere 0.1 percent, but it's a start.) The country's staggering unemployment rate also has started inching down. And Spain's basket-case banks? Thanks to a € 41 billion European Union bailout, along with massive consolidation and massive ongoing deleveraging, they too appear to be on the mend.

What's more, foreign investment is on the rise. In the past year hedge funds, private equity funds, sovereign wealth funds, and other foreign investors have been trolling the Spanish market "looking to make the most of the situation," as Sebastian Albella, a corporate partner in Linklaters' Madrid office puts it. They have begun snapping up distressed real estate properties and other bargain-basement-priced assets. Last summer, Linklaters advised U.S. private equity firm Centerbridge Partners on the acquisition of roughly 1,400 residential properties in Spain from Banco Santander S.A. subsidiary Banesto. Another recent buyer: Microsoft Corporation founder and multi-billionaire Bill Gates, who in late October laid down € 113.5 million ($155 million) for a 5.7 percent stake in debt-laden Spanish construction giant Fomento de Construcciones & Contratas S.A.

Indeed, thanks to Gates and other deep-pocketed foreign investors, Spain's recently moribund M&A market is showing signs of life. In the past year, the total value of transactions in Spain has nearly doubled from just over $24 billion to roughly $48 billion, according to the M&A tracking firm Mergermarket Ltd. The number of deals also has climbed (albeit less dramatically) over the same period, from 255 to 271.

"I think we're seeing the light at the end of the tunnel," says Inaki Gabilondo, Spain managing partner at Freshfields Bruckhaus Derringer. "It's not a very bright or shiny light, but it's there."

For Spanish lawyers, the silver lining of the 2008 crash was a spike in restructuring and employment work, as well as financial crisis-related litigation, which helped local law firms ride out the worst of the downturn. Today, with no end in sight to the myriad claims against Spain's many failed banks, litigation is likely to continue to be a steady revenue-generator for firms. It's certainly helping market newcomer Clyde & Co, according to Madrid partner Ricardo Garrido. Among other matters, he says the firm is defending insurers in one of Spain's biggest suits—stemming from the government's failed bailout and disastrous 2011 public offering of shares in the bankrupt financial giant Bankia. And at Baker & McKenzie, Spain managing partner José Maria Alonso says the recently expanded 20-lawyer litigation group is representing major banks in a consumer class action tied to the "floor clauses" for mortgages, along with handling a wide range of financial crisis-related contractual disputes.

Thanks to new tougher capital reserve requirements, Maria Alonso and other Madrid-based lawyers point out, Spain's debt-laden banks are now in deleveraging mode. Consequently, they contend that the real near-term action for lawyers is M&A—especially since over the past year Spain's banks have transferred more than $65 billion of soured real estate properties and loans to SAREB, the so-called bad bank that was created as a condition of the Eurozone bailout—and in the year ahead SAREB will be auctioning off those assets in earnest.

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