Colony of errors

3 January 2008 By George Hay Follow @gfhay

Spain’s second largest property group is in a tailspin not just because it borrowed excessively to invest in overvalued assets; its chairman financed his own 40% stake by borrowing. When prices rise, double leverage multiplies the gains. When they turn, it magnifies the agony.

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Shares in Inmobiliaria Colonial fell 11% on January 4 after some of the Spanish property company's largest shareholders revealed their stakes were partly financed by derivatives.

The news, which followed a 40% drop in the share price on December 27 and 28, came after Spain's regulator CNMV asked the shareholders to reveal the nature of their holdings. Colonial had already said unwinding derivative positions were to blame for the falls, which culminated in chairman and largest shareholder Luis Portillo quitting the company on December 31.

Colonial's second biggest shareholder, Luis Emilio Nozaleda, also resigned from the board on the same day. Nozaleda, who owns 16.3%, admitted that his company Nozar had lowered its stake on December 27. Nozar also revealed that over half its Colonial stake is held in equity swaps and other derivatives.

Portillo, who holds 40.4%, said on January 2 he was not responsible for the fall as his banks had not sold any of his shares. But he admitted that he had missed a margin call payment of E27.2m on December 28 and is currently negotiating with his banks to try to avoid a similar situation arising on 19.4m shares in equity swaps and a further 15m bought on margin.

José Ramón Carabante, who owns 4.1%, Alberto Cortina Koplowitz, who owns 9%, and four other board members also resigned. The board now comprises 11 members with Portillio's former deputy, Mariano de Miguel, as chairman.

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