Junk Bonds For Tourist Resort Modernisation?

Bankia is Spain's fourth largest bank. The name will mean a great deal to a great number of people, especially those who are customers in Mallorca of Bancaja. They will recall some of the slight inconveniences which occurred when Bancaja, along with six other banks, were rolled into the formation of Bankia. In its three years of existence Bankia has enjoyed anything but a smooth journey. The bank required a bailout last year, trading in its shares were suspended, it made a loss of 4.3 billion euros, its chairman Rodrigo Rato, at one time a leading figure in the Partido Popular and a former managing director of the IMF, stepped down, having been named the worst chief executive of 2012 by "Business Week" and then being charged with accounting irregularities, and its creditworthiness was reduced by Standard & Poor to junk bond status.

By March of this year, the bank's losses were put at 19.06 billion euros. Had the Spanish Government not partially nationalised Bankia and taken a 45% ownership, Bankia would almost certainly have collapsed. The toxic debt it had assumed through the merger of the different banks would have killed it.

The story of Spain's economic crisis and the role of badly managed banks (mainly the "cajas", the local savings banks) is well known. Bancaja and the Caja Madrid were the two largest banks and the two biggest offenders that went into the formation of Bankia. It was the mad, uncontrolled lending of these savings banks which helped to bring Spain to its knees. The consequence of the banking crisis was that credit all but dried up. Yet, it is beginning to be released again and, astonishingly enough, Bankia is one of the banks providing the credit.

The regional government in the Canary Islands has arrived at an agreement with Bankia whereby up to one hundred million euros will be made available as credit. The money is intended to modernise and diversify the islands' tourist sector and will be targeted principally at projects to improve tourist accommodation and areas and the "complementary offer" (more or less anything which isn't hotels); there will be an emphasis in innovation as well as on renovation. The credit isn't therefore being thrown straight at the Canaries government but will be used once Bankia has studied proposals and financing requirements.

In principle, the scheme has merits. The main drawback with it might be that the very name Bankia, with its lousy creditworthiness, is being associated with it. But then, as the Spanish Government has such an interest in the bank and as tourism is supposedly a driver of overall economic recovery, then the assets that the bank is sitting on might as well be put to some good effect. (It may be heavily in debt but it has vastly greater assets than debt.)

Revitalising the tourism sector cannot be something which the government funds or funds alone. The investment budgets for the regions, such as that for the Balearics, show how little money there is for general infrastructure. The money has to come from somewhere else, and typically it has come from the banks. But if the Balearics were to look at a similar arrangement to the one that the Canaries have concluded with Bankia, what could one hundred million euros achieve?

To put this into perspective, the transformation of Magalluf that is being driven by Meliá Hotels has a budget (that of Meliá and its partners) of 45 million euros. It is expected that the amount will increase to 150 million once other businesses and investors join in. The Bankia credit in the Canaries is for the whole of the Canaries. If it will cost 150 million to renew one resort, then 100 million, spread across various resorts, doesn't therefore necessarily get you a great deal.

The Balearic Government has set its stall out to modernise the "mature" resorts in Mallorca and the Balearics. But which resorts aren't mature? Magalluf might appear to be a special case deserving of special investment, but it isn't a special case. It has been made special for the wrong reasons and also for the fact that Meliá has such a strong presence in the resort. One can name any number of other resorts which need similar investment and similar projects.

The government's desire for modernisation has one big problem - its financing. The Spanish economy may be showing signs of life returning and the stock market may be performing well, but it is difficult to see the banks unlocking the coffers and chucking huge amounts of euros at the resorts for what are essentially construction projects. There is still too much baggage and there are too many weather eyes being cast on the Spanish banking sector for this to happen. But at some point the funding has to be released. And how much might this be? Don't forget some of the extraordinary sums that were spoken about for renewing Playa de Palma alone. 4,000 million up to 2020 was one.

Bank finance is going to be needed for Mallorca's resorts, but which bank's? Bankia's? The name would be enough to make you shudder.