The largest Spanish corporate default, Martinsa-Fadesa, a Spanish homebuilder, signals potential risks in SME portfolios, Deutsche Bank analysts said.

According to press reports, the company had debt outstanding in excess of Ä4 billion ($6.3 billion), held mostly by Spanish banks. Martinsa-Fadesa took out the Ä4 billion loan in April 2007 to finance a merger. It now owes approximately Ä2.6 billion that is due in September. The firm also has Ä2.5 billion of normal debt to fund operations.

"Taken in a broader context, the default is not surprising considering the pace of deterioration in the Spanish housing market over the past year," Deutsche Bank analysts said. Over recent months, the pace of Spanish corporate insolvencies has also increased, driven by construction and real estate development-related corporate failures.

As the interest of investors and banks wanes, property firms are finding harsher borrowing conditions that include more punitive terms on renegotiated debt. Several small property firms have filed for creditor protection. Last week, Barcelona-based Habitat refinanced only Ä1.6 billion the day before its deadline. Bank lender nonperforming loan ratios have also come under pressure but still remain some ways off their all-time record highs seen in the early 1990s.

Deutsche Bank said that the potential exposure of Spanish SME CLOs to Martinsa-Fadesa is limited because of the company's size. This would have technically disallowed its inclusion in some, if not most, securitized SME portfolios. The property firm also does not meet the definition of an SME under the legal European Union definition that requires an SME to have fewer than 250 employees, annual turnover not exceeding Ä50 million or a balance sheet of Ä43 million.

"The bigger issue is of course the extent of second-order failures following the bankruptcy of a market leader, in an industry that is heavily represented in SME CLO portfolios," Deutsche Bank said. According to the bank, Spanish SME CLOs can have construction/real estate concentrations ranging anywhere from 16% to 60% and on average around 30%.

"CLO portfolios have already exhibited a perceptible rise in both arrears and defaults (recent vintage especially), with a few negative rating actions taken," analysts said. "As we have often argued, the sector now appears poised for further deterioration in collateral performance (and greater ratings volatility) as the Spanish real estate boom comes to a violent end."

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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