Interview with Ander Valverde, partner, Pérez-Llorca
The energy sector will continue thriving in the coming months, and there will be significant activity related to distressed M&A and rescue finance, says Ander Valverde.
LEADERS LEAGUE: How has the banking and finance sector in Spain evolved over the last year?
ANDER VALVERDE: As a result of the Covid-19 pandemic, 2020 has been a very busy and challenging year in the banking and finance sector.
On the positive side:
The Spanish Government has approved a number of government-sponsored loans, mainly in the form of the “Líneas ICO”. The purpose of these loans is to support companies in terms of their working capital and general corporate needs. We have been very busy advising banks and companies on these government-sponsored loans.
As in every recession, our practice has proved to be anti-cyclical. We have noticed a peak in refinancing and restructuring work, although not as much as expected given that many companies are currently sitting on piles of cash – provided through government-sponsored loans (“Líneas ICO”) – and this is temporarily enabling them to postpone an overall refinancing or restructuring of their debt.
In Spain, despite Covid-19, essential sectors such as energy have continued to boom. We have seen a lot of M&A activity in the energy sector, as well as greenfield and other energy development projects. This has meant there are a lot of finance deals involving acquisitions of energy projects and project finance transactions.
There has been quite of lot of activity in the real estate sector, particularly in the context of the acquisition of distressed assets and the acquisition or development of logistic assets. This has led to a significant number of real estate finance deals to fund such acquisitions.
On the negative side:
The pandemic has had a significant impact on the M&A market. Covid-19 and the consequent ‘Great Lockdown’ (that the IMF described as the worst recession since the Great Depression) have led to a substantial decrease in M&A activity, except in certain sectors such as energy and some distressed M&A transactions. Of course, since M&A deals are usually financed with debt, a decrease in M&A activity has led to a consequent decrease in leveraged finance and acquisition finance transactions.
Over the last few years, Spain had been experiencing a boom in direct lending (that is, lending by non-bank lenders) on many fronts, mainly acquisition finance, real estate finance, growth finance, special situations, and rescue finance. However, given the Covid-19 pandemic, we have seen a decrease in activity in the direct lending market in terms of acquisition finance and growth finance. The reason for this is that M&A activity has declined and growth plans have been postponed. Meanwhile, government-sponsored loans have become another “competitor” in terms of direct lending. This contraction of the direct lending market has greatly impacted our work.
What are currently the biggest opportunities for banking and finance lawyers?
We sense that diversified banking and finance practices – particularly those including finance lawyers that feel comfortable as ‘all-rounders’ and that can work on all kinds of debt and restructuring transactions – will have the biggest opportunities. In contrast, niche practices will suffer the most.
On the ‘new money’ deal front, we believe that the biggest opportunities will be in the energy sector (which has continued to demonstrate growth), distressed M&A activity and rescue finance. In the real estate sector, we also think that 2021 will provide a lot of opportunities in certain asset classes, such as hospitality, tourism and entertainment. Such opportunities will trigger real estate finance activity.
In addition, we also expect to see a lot of refinancing and debt restructuring activity in 2021. The year 2020 has not been as busy as expected in this sense because companies have postponed their refinancing and restructuring plans thanks to government-sponsored loans. Such plans will probably have to be reactivated in 2021.
‘We expect to see a lot of refinancing and debt restructuring activity in 2021’
How are clients demands changing in terms of what they want from legal service providers?
Money-wise, more competitive pricing and fee structures. Work-wise, the complexity of the current situation and the approval of new rules mean that clients are demanding creativity, resilience, sophisticated advice and much more involvement from partners.
What are the biggest challenges banking and finance clients currently face?
The magnitude and speed of collapse in activity that followed the ‘Great Lockdown’ has resulted in massive domestic and international policy responses, particularly the easing of monetary policy, government-sponsored loans, concessional financing, grants and debt relief. Consequently, there is a lot of liquidity on the market. This has resulted in more competition between banks.
The increase of liquidity in the banking sector and the massive government-sponsored loans made available to companies entail a significant challenge for direct lenders and alternative finance providers. But we expect them to continue their growth in the Spanish market given their flexible financing structures and solutions.
Additionally, in Spain, we are experiencing a new wave of M&A and concentration in the banking sector. This will result in significant challenges for banks.