More pain for Spain as Pescanova flounders

June 2013 | DEALFRONT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

Since the onset of the financial crisis, the Spanish economy, like many southern European states, has had to withstand a turbulent and troubled time. As the country has teetered on the brink of a full scale economic meltdown, unemployment has spiralled to a record high of 27.2 percent. To further compound the misery, the Spanish economy is expected to contract again in 2013, shrinking by 1.6 percent.

It is against this backdrop that the collapse of Spanish fishing giant Pescanova S.A. occurred in mid-April. Pescanova, which has seen its stock drop 99 percent since the start of 2012, is a global fishing firm with operations in 21 countries worldwide. The company also has a global fleet of over 100 ships and employs over 10,000 in its various operations.

The firm filed for insolvency on 15 April citing debts of between €1.2bn and €1.5bn – eight times the company’s annual profits. However, Pescanova’s real debt has been reported as being at least €3.3bn. Some analysts have pegged it – including administrative costs and supplier debt – at nearer €4bn, a figure which would make the company’s insolvency the third-largest in Spanish history.

A number of factors have contributed to the company’s insolvency filing. Most notable is the collapse of the Spanish savings banks system. Savings banks Caixa Galicia and Caixa Nova, which have now been incorporated into a nationalised bank, made capital readily available to Pescanova and the company’s board should they encounter liquidity issues. This lifeline has now disappeared.

Caixa Galicia and Caixa Nova also held a 30 percent stake in Pescanova which they were required to sell as a result of receiving European aid. Through this sale the banks exposed Pescanova to new foreign investors and board members, who increased scrutiny of the firm. By way of contrast, the company’s previous board was made up entirely of chairman Manuel Fernandez de Sousa’s friends and family.

Further exacerbating Pescanova’s financial predicament has been its mismanagement of one of the world’s largest turbot farms in Portugal, at which thousands of fish died in 2011 and 2012. The loss of breeding stock at the facility, which produces over 6000 tons of fish annually, was due to the faulty construction of a hydraulic system. The firm reportedly sustained losses in the region of €70m.

Indicating the depth of the controversy surrounding Pescanova, the Spanish court that accepted the insolvency filing took the unorthodox decision to suspend the company’s board and chairman Mr Sousa during the proceedings. Ordinarily, existing management structures are maintained when a company enters voluntary bankruptcy in Spain.

The court also placed the stock market regulator, Comisión Nacional del Mercado de Valores (CNMV) in charge of appointing independent administrators to manage Pescanova’s affairs. CNMV enlisted Deloitte 24 hours after the board was suspended.

Mr Sousa, the son of the company’s founder Jose Fernandez, has personally come under intense scrutiny from regulators and auditors, as the firm revealed that he had sold half of his 14.4 percent stake in Pescanova in the months leading up to the collapse without informing regulators, as is required by law. This revelation only came to light on the day of the insolvency filing. Analysts have suggested that the sale generated €27m, a third of which Mr Sousa lent back to Pescanova. In a statement, the firm noted that “concerned about the group’s liquidity and Pescanova’s difficulties in financing itself, the chairman decided to offer his own patrimony to the company to resolve urgent liquidity problems.

The firm is also being investigated by the CNMV for possible insider trading. Moreover, the company failed to submit its accounts on time after a disagreement and subsequent parting of ways with auditors BDO.

Pescanova has begun the process of divesting assets in order to reduce debts. Notably, the company has been attempting to sell its aquaculture operations in South America, amongst other regions. The complicated insolvency process could now take a number of years to conclude as Pescanova has stakes in around 89 associated companies worldwide.

On 14 May it was reported that the firm’s creditor banks – Bankia, Sabadell, Popular, NCG Banco, Caixa Bank and Deutsche Bank – had agreed to grant Pescanova a €55m loan in order to keep the company operating in the short term. It is believed that some of the funds will be used to pay suppliers of the company’s subsidiaries in South America.

Richard Summerfield