‘Bad bank’, bad news

Spain is reportedly gearing up to buy its failed toll road concessions.

If recent press reports are any indication, the Spanish government is gearing up to set up a ‘bad bank’ that will house the country’s ten or so failed toll road concessions. 

While details are still sketchy, the broad strokes appear to be thus: the government would buy back the troubled roads from concessionaires, forcing them to take a 50 percent haircut on equity. It would then enter negotiations with the creditor banks on the circa €3.5 billion of debt attached to the toll roads. 

Here accounts differ. Some newspapers believe creditor banks will also be forced to take a haircut. Others are speculating the Spanish banks will actually buy out all foreign creditors, assuming the entirety of the €3.5 billion, and renegotiating it on terms reflecting the new counterparty, i.e., the Spanish government. 

There is also talk of additional financing to help meet rising land expropriation costs, which have been the bane of Madrid’s toll roads in particular. 

It appears, though, that the bad bank is meeting with resistance from some of the concessionaires. 

Concessionaires backed by developers have apparently already written down their equity for these roads – and so are actually in for a bit of good news – but those backed by pure-play construction companies haven’t. The latter, thoroughly black-eyed by Spain’s ongoing crisis, are reportedly not eager to record the necessary write-downs. 

Whatever shape the government rescue takes, one seems to be coming. It will probably be dressed-up, as it’s very unlikely the Spanish government is in any shape to add an extra €3.5 billion to its burgeoning deficit. 

The bad bank will probably come in the shape of a public investment agency; the stake purchases in the form of public enterprise investment; and the assumed commercial bank debt, somehow mitigated by the tolls collected on the roads, all wrapped in a Eurostat-friendly way. 

On the face of it, the plan seems like good news. By law, the Spanish government will have to take over these concessions if they go bust anyway and several of them have already started bankruptcy proceedings with the courts. Buying at least 50 percent of the equity will help soften the blow for sponsors. And even if banks have to write down some of their debt, they will now have government debt on their books. 

But in fact, it’s pretty terrible news. It’s not that Spain is the only country that has made mistakes regarding its toll road concessions. Australia too has grabbed headlines several times over recent years for its troubled roads. 

However, in Australia concessionaires were allowed to go bust, demonstrating that the risk transfer mechanism central to public-private partnerships works. The ‘rescues’ came from other parts of the private sector, which bought the troubled roads at heavily discounted prices. 

In Spain, concessionaires will apparently get a government bailout. This will again put the spotlight on the cosiness between the authorities and the country’s construction industry – the same pairing many blame for Spain’s real estate bubble and its devastating aftermath. 

And what about the solar operators that have had to swallow successive retroactive tariff cuts and are now in danger of defaulting on their project finance loans? What sort of message does a roads bailout send to them? 

Presumably that there is money to rescue certain ‘favoured’ sectors, but not to fund tariffs in ‘disfavoured' ones. Talk about moral hazard.