Articulo de Walt Streer Journal

The latest twist in the debt restructuring of embattled Spanish property group Inmobiliaria Colonial SA offers a glimpse of how European lenders hope to avoid big loan defaults.

Last year, lenders faced three alternatives for dealing with the debt of overleveraged Colonial: let the company become insolvent, pursue a policy of "extend-and-pretend," or restructure the company's debt and put it on a solid footing for the anticipated recovery of real estate.



The main creditors—Eurohypo AG, Royal Bank of Scotland PLC and the Credit Agricole Corporate and Investment Bank (Calyon)—opted to restructure by converting bonds and bank debt to equity.
[EUROPROP]

The first step has now taken place. Earlier this month, Colonial issued 5.7 billion new shares at 12 European cents a share (16 U.S. cents), representing 76.29% of the company's total outstanding shares after the issue. On March 24, the new shares were swapped for convertible bonds held by the company's creditors, putting about 92% of the company under the control of its main creditors and other lenders. RBS, Eurohypo and Calyon now each hold 14.95% of Colonial. Separately, Spanish savings bank La Caixa converted bonds it held and became Colonial's fourth-largest shareholder, raising its stake to 12.36% from 1.3%.

In a second step in the restructuring, pending shareholder approval of the move at a general meeting April 20, Colonial will issue another 15 billion shares at 12 European cents a share to its creditors in exchange for retiring about €1.9 billion in debt. As a result, Colonial's market capitalization will rise to about €3 billion, up from about €245 million now. The company's loan-to-value ratio had fallen to 64.2% by the end of 2009, from 79.4% a year earlier. Now, when the share swap is concluded in June, Colonial will have debt of €2 billion with an average maturity of five years, returning the company to normal financial health.

"Colonial is back in business," Chief Executive Pedro Vinolas Serra told The Wall Street Journal in an interview. "After the debt-for-equity swap, we will be back to where we used to be in terms of market value."

Expect more such deals in the future. In fact, the restructuring of Colonial's debt could be something of a template for some of the workouts expected over the next two years.

Colonial is just one of the many property companies around Europe that banks are working to restructure.

As European property markets begin to recover, banks must decide how to deal with this mountain of outstanding debt on commercial property. Estimates vary of how much debt there is and how much is due to mature soon.

In a report published this week by DTZ Research, analysts suggested there was €1.848 trillion in outstanding commercial real-estate debt in 24 European countries at the end of last year, up 65% from 2004.

The DTZ report also said €482 billion in commercial-property debt is up for refinancing in the next two years.

Not all of the loans will be able to be extended, however. DTZ suggests €115 billion of the €482 billion worth of debt due to mature in 2010 and 2011 may not be able to find refinancing.

Researchers at CB Richard Ellis, the property-services group, say in a study that there is about €207 billion of "problem debt," loans at high loan-to-value rates on substandard commercial property in Europe.

Lenders are not only betting on Colonial's ability to survive the crisis and again be able to service its debt. Lenders are also demonstrating that, given the right set of circumstances, they are willing to share the risk with their clients if there is potential to profit from the recovery. In the last downturn, European banks often foreclosed on borrowers and disposed of property quickly. But this time lenders have held on, in part because they saw others reap the profits the last time around. What will persuade lenders to take the risk?

"It is the belief that there is a company there which is worth trying to preserve, where value can be enhanced by its survival rather than looking at liquidation today," says Pete Ballard, senior adviser with the global restructuring group at RBS.

Colonial's lenders are betting that, with its debt under control, the company can ride out the rest of the storm. Colonial ran into trouble when it borrowed heavily during the boom years. Property values for speculative development projects, the so-called "land banks" held by many Spanish property companies, fell so far as to become worthless.

The lenders, however, believe the company can still turn itself around based on the strength of its commercial assets in Madrid, Barcelona and Paris, which are held in its subsidiary Societe Foncière Lyonnaise. Office properties owned by SFL in the central business district of Paris include the Louvre business center, the Edouard VII complex and Washington Plaza. Vacancy rates are low, less than 10%, and rent has remained stable.

Lenders are betting that the SFL portfolio could be a cornerstone of further growth, once property markets recover, and drive Colonial's share price higher. Colonial's shares traded Tuesday at 13 European cents, down 97% from the peak of the boom.

"This is a purely financial investment," said Gisela Brandhoff, spokeswoman for Frankfurt-based Eurohypo.

Colonial's new investors are banking on the company's ability to resume expanding its business. One banker even suggested Colonial could soon raise capital again in order to make opportunistic acquisitions.

But after the rough ride the company has experienced, Mr. Vinola is keen to take things one step at a time.

"We are now getting back to the basics, doing what we are good at, which is managing our portfolio," he said.