Spain is teetering on the edge of financial collapse, but you might not guess it these days from the guys in pinstripes lounging in the lobby of the elegant Palace Hotel in Madrid. With uncertainty comes opportunity, and the suits who are foreign vulture investors—the kind who can afford the hotel's $6,000-a-night royal suites—are hunting for bargains in the battered loan portfolios of beleaguered Spanish banks. "Lone Star, Cerberus, Apollo, TPG, Blackstone, BlackRock—the usual suspects are all monitoring opportunities here," says José Enrique Concejo, head of Spanish and Portuguese financial institutions for Société Générale, reeling off a list of international private-equity and hedge-fund giants.
Unlike the government debt crises in Greece and Italy, Spain's biggest problem was far too much borrowing during the real estate bubble of the early 2000s. When the bubble burst in 2008, property values collapsed and many borrowers could no longer make their interest payments.
Four of Spain's largest banks have been nationalized, and they and others have written off 100% of the value of many troubled loans. For vultures, that creates incentive. "Even if they pay a bank five cents on the dollar, that is a capital gain for the bank and a bit of cash," explains Concejo. The vultures then profit if they can collect more from the borrowers.
In the case of mortgages, banks are selling underlying properties for whatever they can get. In resort towns on the Mediterranean coast and in Seseña, a ghost suburb of new apartment blocks near Madrid, condo prices have plunged by more than 50%.
This summer, Spanish and European Union officials discussed setting up a so-called bad bank, now a standard way of dealing with national banking crises. Troubled loans are transferred to a state-sponsored institution, which gives the lenders government-backed securities in exchange. The key question: At what value do you transfer the loans?
In the meantime, and afterward, Concejo says vulture investors perform a valuable service. "People roll their eyes when they hear the vultures are looking for returns of 25%-plus, but often they are the only ones willing to take the risk and buy."