TEXT-Fitch report on Spanish corporate sectors

(The following statement was released by the ratings agency)

Aug 1 - Fitch Ratings says the slowdown of the Spanish economy is starting to have negative credit implications for a number of sectors, as underlined by the recent failure of real estate developer, Martinsa Fadesa. This does not mean that all corporate sectors will be hit, although the impact of the downturn may spread if the slowdown is prolonged or intensifies.

"We expect to see further pressure on sectors related to property development, residential building and building materials, as demand contracts and property prices fall," says Erwin van Lumich, Senior Director in Fitch's Corporates team. Consumer sentiment has weakened, evidenced, for example, in a sharp fall in car sales since late 2007. This follows three years of continuous and significant growth in auto sales, with the Spanish market now notably weaker relative to the rest of Europe. Also, like elsewhere in the euro zone, Spanish exporters are suffering from effects of the strong currency.

However, many other sectors should be less affected in the near-term. This includes construction companies with limited residential exposure and a focus on civil engineering as Spain continues to work towards closing its infrastructure gap with other members of the EU. As long as GDP growth does not fall into a prolonged negative spiral, electricity and gas utilities and motorway concessionaires should also continue to fare relatively well, although their earnings will see the impact of slower demand growth. Possible rating changes in this sector are more likely to be M&A-related, as the domestic and European markets further consolidate. This trend was underlined this week, when Gas Natural agreed to acquire ACS's 45% stake in Union Fenosa, which, if approved, will need to be followed by a takeover bid for the remaining shares. Fitch will closely monitor liquidity management for entities with high leverage and sizeable short-term debt payment obligations following acquisitions.

Unsurprisingly, Spanish banks have become more conservative when it comes to corporate lending, placing companies with high financial leverage and working capital needs and short-dated maturity profiles at risk. The volume of capital markets issuance also remains low and numerous companies with refinancing flexibility have decided to postpone transactions in the hope of more attractively priced longer-term funding opportunities. Fitch, nevertheless, notes that lenders, to a large degree, seem to differentiate between companies based on credit profile-related criteria. Even the lending market for the affected real estate sector does not appear to be entirely closed as was highlighted this week when Polaris World, a large development near Murcia, managed to secure funding of EUR241m. Opportunities for this sector, nevertheless, appear limited as banks need to manage their exposure to affected sectors.

Fitch's universe of publicly rated Spanish corporates is skewed towards solid investment-grade names, with substantial concentration in the energy, utilities and transport sector. Ratings for these companies are likely to be relatively unaffected by the slowdown. However, the weakening economy is reflected in the agency's portfolio of 17 non-public shadow corporate ratings, which represents aggregate sales of EUR29.4bn, EBITDA of EUR4.9bn and debt of EUR29.5bn. While the distribution of these shadow ratings is about the same as that of Fitch's European shadow rating universe, with the bulk of ratings at the 'B-' (B minus)-* (41%) /B* (35%) level, about 82% of the portfolio is exposed to cyclical sectors susceptible to a slowdown in consumer spending. About 12% of the portfolio, consisting of companies engaged in homebuilding and related sectors, are rated at 'B-' (B minus)-* with a Negative Outlook, indicating a high probability of financial distress in the near-to-medium term. On the other hand, the high percentage of ratings on Stable Outlooks (64%) is supported by a number of corporates having significant sales outside of Spain and/or strong niche business positions. Fitch has also observed the use of higher levels of debt to fund leveraged buy-outs. The average total leverage for new transactions in Spain was 6.7x in 2007, above Fitch's European portfolio average of 6.4x.