Weighing the Economic Scale
Like Greece, Portugal and Ireland, Spain has been singled out by the European Union for the effects of the economic and financial crisis…….

06 March, 2012
Like Greece, Portugal and Ireland, Spain has been singled out by the European Union for the effects of the economic and financial crisis. Recent events, such as the spreads in recent months, the ongoing debt rating downgrades and the IMFês discouraging data predicting that Spain will continue to be in a recession in 2012 and 2013 and have the EUês highest unemployment rate of 26%, confirm that the country increasingly needs restructuring and operating improvements.
Unlike other countries, 99% of Spainês business structure is formed by small and medium enterprises (SMEs) which generate more than 70% of employment and more than 60% of GDP. A large proportion of those SMEs include the construction sector. Additionally, since most of the companies have not adjusted their business operations to the new sales situation and uncertain environment while the banks have drastically reduced their credit levels, this is leading to technical insolvency and bankruptcy at thousands of companies from practically all the sectors every month.
In addition to the aforementioned, there are three major stakeholders who are confronted with operational restructuring challenges:
-¾¾¾¾¾¾¾¾¾Private Equity Houses, whoês portfolio companiesê equity value is impaired in addition to the companies being over-leveraged.
-¾¾¾¾¾¾¾¾¾Banks with regard to solvent companies, that have excessive gearing and, therefore, which find it difficult to meet their financial obligation repayment schedule. After several unsuccessful refinancing rounds and since they are not in the business of accepting equity as payment, the banks themselves have to resort to operating improvements to boost EBITDA with the aim of meeting the established covenants.
-¾¾¾¾¾¾¾¾¾Parent companies with the desire to divest some of their businesses (subsidiaries) by selling them since they are considered to be non-core. Most of those businesses are considered non-core when their figures jeopardise the other businesses, so they will require operating restructuring in order to be sold at a reasonable price. The restructuring costs are usually lower than the upside that can be obtained when selling a streamlined company.
One of the main problems detected in Spain is that both the banks and the companies themselves realise too late the need for restructuring and, in many cases, bankruptcy and liquidation are practically inevitable. Additionally, many other companies that do detect the need for operating improvements in time do not have the appropriate management skills to do this and are unwilling to let others with experience in this type of situation to interfere in the company. Culturally speaking, this measure has not been developed or accepted in Spain, unlike in the US or northern Europe.
At present, there are many companies in Spain that are on the verge of filing for bankruptcy and, with the requirements of the new bankruptcy law in Spain, they have the challenge and possibility of avoiding it by reviewing their businesses and using professional experts in this type of solution.