The problems of financing real estate developers – Syndicated loan

Until recently we thought that the trigger for a potential crisis in real estate companies in this country would be caused by the current slowdown in sales (or rather stagnation), which after a period of “some peace of mind” motivated by the attempt to sustain the situation on the part of the promoters with concealed price reductions through commercial promotions of all kinds

Subsequent real price decline

Subsequent real price decline

I think we are in this phase, would end in a subsequent real price decline motivated by the need to generate cash at all costs to cover their financial needs, ending in many cases with the financial drowning of many of them and in some cases reaching a situation of failure.

This process is being accelerated by the debt market crisis that is making it extremely difficult to obtain financing from many developers, both for the purchase of land (where the distrust of banks grows day by day), and to develop new promotions or simply continuing the existing ones, and that together with the need to self-finance in large part by the sales themselves, which are paralyzed, is leading many of them to a borderline situation that we will hear about in the coming months.

Also just remember that many of the business plans associated with the purchase of these assets, until not long ago were terribly optimistic, including in them merrily strong price increases, and aggressive sales rates, nothing more similar to reality.

Problems of financing corporate operations

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That said, we find a situation that is also “unexpected”, such as the problems of financing corporate operations carried out a few dates ago. After the financing problems of Inmobiliaria Colonial associated with the syndicated loan used to finance the Opa over the former Colonial, buy 15% of FCC and launch another takeover bid on Jessica, we now find Good Finance’s problems, which we can consider much more serious, as reflected by the dismissal of its CEO.

Good Finance, the real estate company of Sean Cole, bought its real estate division last year from Good Lender for a total amount of 2,200 million euros, going to bill 993 million annually, when its sales were previously 180 million, which suddenly became in the first promoter of Good Finance and multiplied its size by five.

All this seemed positive for a dynamic company, with ambition, which grew to consist of buying a larger one. Now we are faced with the harsh reality, since the banks that initially granted the 1,745 million syndicated loan for carrying out the operation, have difficulties in diversifying the risk of the operation, due to the liquidity crises caused by the problems of the “Subprime”, which has meant an increase in credit conditions, which has triggered the financial costs of the operation.

Sell assets to reduce debt

Sell assets to reduce debt

This operation was also conditioned by the need to sell assets to reduce debt, which caused Good Finance to put Good Lender on sale, the subsidiary for the sale of second-hand housing, and a land package distributed throughout Spain that valued in Spain. 600 million

Any attempt to carry out this obligation with the banks has had no results, and neither has Good Lender been able to sell, nor much of the land, which after passing through the tables of the promoters of half of Spain, has only been able to sell land worth 70 million, thus increasing the financial pressure on the resulting company, in a cycle in which, as we have said before, it takes much longer to sell the housing stock.

If the situation continues like this, we can in the not too distant future hear news of Good Finance. We will follow your situation, like those of many other promoters whose worsening is yet to come …

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