Martinsa Fadesa: the failed real estate giant still walking the tightrope

Five years ago the failure of Spanish real estate group Martinsa Fadesa took over 12,500 families by surprise.

The biggest bankruptcy in the history of Spain, with liabilities of 7.8 billion euros, left them in the grip of uncertainty, facing a situation in which they had already started to pay for a home they had bought but the keys of which had not been handed over to them.

Martinsa Fadesa¡¯s receivers found a solution for these families and for others, but they put an end to Fernando Mart¨ªn¡¯s dream of being the chairman of the largest real estate developer in Europe, with a presence in 12 countries.

Five years down the road, still carrying a pile of debt and heavy losses, the company does not yet have survival guaranteed, say sources in the sector.

Martinsa Fadesa¡¯s failure saw the collapse of a sector that had surged on a decade-long boom that turned into a bubble, which dramatically burst.

Martinsa, which was formed from the merger of the property companies Martinsa and Fadesa in 2007, was among only 5 percent of companies in the real estate sector that managed to survive the bursting of the bubble after reaching an agreement with its creditors to emerge from receivership and continue operating.

These days, Martinsa Fadesa¡¯s financial figures are more like those of a small- to medium-sized company than those of a multinational. The firm¡¯s revenues last year were 160 million euros, 86 percent less than when Mart¨ªn created his empire in 2007. It now has a market share of only 0.6 percent and its workforce has been reduced from 880 employees to just 69. It booked a loss of 584 million euros.

Its debt remains colossal at 5.735 billion euros. ¡°The company, like most in the real estate sector was a credit junkie,¡± as a source close to the company graphically puts it.

In other times Martinsa Fadesa could have been considered too big to fail. But the sector took it for granted that the banks had already provisioned for potential losses that caused the non-performing loans of the financial sector to jump by 31 percent in a month after the company filed for receivership.

The real state sector had already received a warning about the banks¡¯ willingness to allow big companies in the sector to go under with the decision to liquidate Valencia real estate group Llanera.

The creditors¡¯ agreement signed in January 2011 gives Martinsa Fadesa eight years, extendable to 10, to pay back its debt. The restructuring plan calls for it to settle about 0.5 percent of its liabilities in the first few years of the accord, with the bulk to be paid back toward the end of the refinancing period.

The company has been able to return 41 million euros in two years. ¡°So far there has been nothing to reproach the company for; it has fulfilled its commitments,¡± a financial source said.

¡°Another thing is what we are expecting to happen and that worries us.¡±

The main problem facing the company is the state of the real estate market, which, far from growing rapidly as Martinsa Fadesa expected in 2007, is still shrinking.

¡°It¡¯s in a difficult situation. The market won¡¯t pick up until the labor market improves,¡± another financial source says.

Martinsa Fadesa¡¯s general manager, Antonio Gil Rabad¨¢n, acknowledges that the ¡°crisis has been much deeper and longer than expected¡± but points to the fact that the company is meeting its commitments.

The company¡¯s workforce has been reduced from 880 employees to just 69

¡°It is essential that new reforms are undertaken and for those already in place to go further because the economic situation and the lack of credit are not sustainable in the long term, not for Martinsa Fadesa or almost any other Spanish company,¡± he argues.

Sources in the know about the terms of the receivership explain that Martinsa Fadesa was able to offload some of its assets to return debt in the form of dation in payment, on which the banks have to pay value-added tax. That provided the company with some liquidity. But dations in payment are a double-edged sword in that while they ease a company¡¯s problems, they normally leave it stuck with assets that are less attractive. Despite having cut its pool of land ¡ª the least liquid of real estate assets ¡ª Martinsa Fadesa is still sitting on 14.8 million square meters.

¡°It is meeting its commitments and that calms creditors,¡± says Mar¨ªa Jes¨²s Puga of Iure Abogados, a law firm that specializes in receivership. But that doesn¡¯t mean they haven¡¯t had a few scares. The 2012 annual report shows negative cash balance of 16 million euros, which infringes the terms of the creditors¡¯ agreement. Sources close to Martinsa Fadesa say this situation will be resolved by swapping bank interest payments that are due for capital.

However, Martinsa Fadesa also has to find a solution for its shareholders. Trading in the company¡¯s shares has been suspended since July 2008. Its return to the market depends on it providing information on observations made by its auditors on its financial results for the first half of this year.

But the main task facing the company is how to start building and selling houses again under normal conditions. And that is not just dependent on the management of Martinsa Fadesa, even though there is more than enough motivation for it to do so: a clause in the company¡¯s commitments to its creditors means it will be entitled to a payment of nine million euros in 2019 if it succeeds in doing so. That should be a good enough incentive to pull the company out of the hole in which it finds itself.