Spanish Healthcare Firm Grifols' Reputational Damage and Debt Woes: European Central Bank Probes Lenders

The European Central Bank (ECB) has initiated inquiries into several lenders, urging them to disclose their exposure to Grifols SA GRFS and its affiliated entities following accusations of financial manipulation by Gotham City Research. 

The Barcelona-headquartered pharmaceutical company denied allegations that it manipulated its financial accounts, asserting that it has not misrepresented its debt and earnings through transactions with a related entity.

Gotham City Research alleges that Grifols included satellite companies’ earnings in its accounts but excluded their debts, distorting its actual leverage ratio. 

Gotham’s investigation suggests that Grifols’ actual debt could be closer to €8.9 billion, significantly higher than the reported €8 billion. They estimate that the company’s leverage is not the reported 6x but could be alarmingly between 10x-13x.

Grifols could face drastically higher financing costs if these claims are substantiated, potentially pushing the company into an unsustainable financial position.

Grifols contends that all its accounts undergo rigorous audits and regulatory scrutiny.

According to Reuters, sources reveal that the ECB has contacted various banks, including Spanish and other eurozone banks, to comprehensively understand their current exposure to Grifols and its network of connected companies. 

The central bank, supervising larger banks through the Single Supervisory Mechanism, aims to assess the potential risks and impact on the banking sector.

Grifols, with a net financial debt of €9.5 billion, plans to repay €1.8 billion due next year, partially relying on selling a stake in Shanghai RAAS Blood Products to China’s Haier Group. 

However, concerns about the deal’s execution and the reputational fallout from the allegations have contributed to a nearly 40% decline in Grifols’ stock.

In an SEC filing, the company said that the vice-chairperson of Haier Group Corporation has textually declared: “We continue to work to close the deal as originally planned.”

The transaction continues progressing as planned, and Grifols expects to close this transaction during the first half of FY 2024, as has already been communicated to the market.

The ECB’s focus extends to companies partially controlled by the founding Grifols family, including Scranton Enterprises. 

Supervisors express concerns that the drop in Grifols’ shares may necessitate family-connected companies to provide additional margin for loans collateralized with Grifols shares.

Price Action: GRFS shares are trading 0.44% higher at $6.81 premarket on the last check Thursday.

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