October 1, 2014 / 3:02 PM / 3 years ago

Foreign banks resist losses on Spanish motorway rescue

* Foreign banks don't like proposed 50 pct forced loss

* Talks with government drag out any bail-out

* Cash-strapped Spain reluctant to take on bulk of loans

By Sonya Dowsett

MADRID, Oct 1 (Reuters) - Foreign banks are dragging out a 2.3 billion euro ($3 billion) rescue plan for bankrupt Spanish motorways, seeking better terms to recoup more of the money they lent the nine toll road companies, three sources said.

Under the plan, the motorways would be nationalised but the government is desperate to avoid taking on the bulk of debt linked to the road projects which amounts to more than 4 billion euros.

Instead, the banks would be forced to take losses on the loans, known as a "haircut", meaning the government would assume responsibility for a smaller debt at a time when it is under pressure to bring its budget deficit within strict European Union targets.

Spain is barely out of a national debt crisis but, with an eye on parliamentary elections due next year, the government plans to cut taxes, further straining its finances.

Domestic banks have largely accepted the terms of the bail-out, banking sources said. But a sticking point for the foreign creditors is the government's proposed 50 percent haircut on their loans to the road operators which went bust after failing to attract enough traffic during the recession.

"The talks are still going on. The foreign banks are pushing for better conditions. It's like they're putting the screws on at the last minute to see if they can get more," said another source with knowledge of the talks.

Traffic has fallen by more than a quarter on Spain's toll roads in six years of economic downturn, official figures show. Flow on the bankrupt highways which mostly radiate from Madrid has dropped further still as many have toll-free roads running in parallel.

Most banks and companies have already made provisions for the losses, sources said. Some of the foreign investment banks have approached law firm Linklaters for legal advice, two sources said without naming the banks that had taken this step.

Linklaters declined to comment.

The government held meetings with all the international banks, which together account for around 40 percent of the roads' debt, at the beginning of September to try to reach consensus, one source with direct knowledge of the talks said.

International banks seeking better terms include RBS , ING, Commerzbank, Lloyds and HSBC, the source said. BNP Paribas also had investments in the roads, another source said.

These banks declined to comment publicly. HSBC did not respond to requests for comment.

"We have not accepted the terms offered by the Spanish government, in line with many other foreign banks that have unified on this," said a source at one of the banks, who spoke on condition of anonymity.

The government would not name the banks that had invested in the roads. It has grouped the liquidation proceedings of the nine roads in one Madrid court action, three sources with knowledge of the matter said.

Spanish media reported earlier this month that Banco Espirito Santo, Societe Generale, Dexia , Deutsche Bank and Credit Agricole were also among the international creditors.

Deutsche Bank and Dexia declined to comment. The others did not respond to requests for comment.

SQUEEZED

Under a Spanish law drawn up over 40 years ago, the state is liable for the cost of the land and construction of private motorways if they go bust. The government declined to comment on the talks, beyond saying it was still working on a solution.

Builders including Ferrovial, Abertis, OHL , ACS, FCC and Acciona created joint ventures to win concessions from the government to build the toll roads during Spain's boom years.

The domestic creditors include Santander, BBVA , Bankia, Caixabank, Sabadell and Popular, banking sources said.

Santander, BBVA, Caixabank, Bankia and Sabadell declined to comment. Popular was not immediately available to comment.

Barclays has also lent to the highways, but will transfer the debt to Caixabank by the end of the year as part of an August deal to sell its retail and corporate banking operations, three sources with knowledge of the matter said. Barclays and Caixabank declined to comment.

Banks hold debt linked to the failed motorway companies of around 3.9 billion euros, with a further 470 million of debt with builders. The maximum hit for the deficit would 3 billion euros, the government has said.

Spain has said it will reduce its deficit to about 3 percent of GDP by 2016, implying around 35 billion euros will have to be found from end-2013 to end-2016 to meet the target.

The government is in parallel talks with Brussels to ensure any solution does not entail state aid.

Spain wants to create a state company to house the failed toll roads, forcing a 50 percent loss on the banks and paying the rest via a 30-year bond with a coupon of 1 percent plus a variable factor linked to the traffic flow on the roads.

"The government is squeezed between honouring its obligations with investors and explaining to citizens why it's cutting back on spending for health yet bailing out privately-owned motorways," said Mikel Echavarren, head of Madrid-based real estate consultant Irea. (1 US dollar = 0.7877 euro) (Additional reporting by Robert Hetz, Julien Toyer and Stefano Berra; Editing by Julien Toyer and David Stamp)

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