Spanish groups eye overseas asset sales Large Spanish companies are planning a new round of overseas asset sales and debt reorganisation in the new year, as executives prepare for the consequences of a possible downgrade of the country's credit rating. Following the spin-offs of Telefónica's German unit and the Mexican arm of Banco Santander earlier this year, executives and investment bankers believe a further spate of asset sales and corporate restructuring could be seen in the next six months. Alongside more conventional asset sales - such as a continuing process by Bankia, the nationalised lender, to sell its US division based in Miami - a distinguishing feature of recent spin-offs has been the desire of Spanish companies to place as much of their debt as possible within separately listed overseas businesses. "Spanish companies are now trying to decouple their financing routes from their Spanish parent companies as much as possible by using overseas subsidiaries," says Ignacio Gutiérrez-Orrantia, head of corporate and investment banking for southern Europe at Citigroup. They are looking for liquid markets to tap and better cost of funding and, in some cases, aiming at ringfencing their international operations. In the summer of this year, as Spain's borrowing costs reached their highest levels since joining the euro and a sovereign bailout seemed more likely, it appeared that a fire sale of all assets linked to the country was under way. "During those months it was hard to know what would happen next week, let alone next year," said one executive at a large Spanish company. Many boardrooms had begun to make contingency plans should the previously unimaginable outcome of Spain leaving the euro come to pass. With many of the country's biggest companies unable to borrow money, the paradox of Spain's multi­nationals became more apparent: more than half of the revenues from companies in Spain's Ibex 35 index are derived from outside Spain, often generated using assets far away from the eurozone, yet their debt is still considered "Spanish" by investors. Facing steep costs to re­finance this debt - if it can be refinanced at all - some of Spain's largest companies are being forced to split themselves apart, in a partial reversal of a decade of debt-fuelled overseas acquisitions. Fernando Maldonado, head of investment banking in Iberia for Credit Suisse, argues that more companies are likely to take advantage of good valuations for their overseas assets to raise funds. As Spain faces a likely sovereign credit downgrade that would see the once triple A-rated nation declared a "junk" investment, two of its largest companies, Telefónica and Banco Santander, have this year spun off overseas subsidiaries in a way that allows those units to be funded at rates closer to those of the market they are based in. Telefónica, the former state telecommunications monopoly that this year lost its place as Spain's largest company by value, had over the past decade embarked on an acquisition spree worth nearly $85bn, leaving it with net debts of €57bn. With the risk of a credit rating downgrade high for the telecoms company, it has not only cut its dividend but also begun to unravel some of the deals that once made it the most admired operator in its sector among investors. Having spun off its German unit, Telefónica is also planning to list part of its Latin American operations in a deal that will not only raise cash but also allow it to house more of its debt within its local subsidiaries. The company's management hopes this will mean it will be penalised less for its Spanish listing by investors. Banco Santander, meanwhile, which has long pursued a strategy of listing local subsidiaries where it can, this year floated part of its Mexican unit and has said it plans to list the majority of its overseas operations on local exchanges in the coming years. Both companies hope that clearly marking their component parts to investors in this way will further break the link between Spain's sovereign debt problems and their own financing costs. Telefónica's German unit should now be able to borrow money at a level closer to other German companies operating domestically, for example. The irony is that, while many of Spain's largest companies are facing problems because they borrowed heavily to buy overseas, these same assets could now prove their salvation. "When you look at many large Spanish companies, the acquisitions they have made have left them with debt, yes, but they have purchased well," says Mr Gutiérrez-Orrantia. They now have significantly more flexibility than before to tackle the current sovereign situation.