MADRID, Jan 15 (Reuters) - Spanish builders have cut debt by selling assets and reducing staff, leading to sharp stock gains in the past year and catching the eye of billionaires George Soros and Bill Gates.
But other investors are cautious, saying debt levels are still high and the construction sector is stuck in the doldrums after a property crash that helped drive Spain's economy into its worst slump of modern times.
The country tentatively emerged from recession in the third quarter and foreign investors have started to return, putting behind them doubts about Spain's ability to stay in the euro that arose during the regional debt crisis.
Although Spanish builders including Sacyr and FCC have made progress on cleaning up their balance sheets and looking for business abroad, the domestic market property market they depend on is still in free fall.
"The situation of most of these companies is still delicate," said Gonzalo Lardies, fund manager at private bank Banco Madrid who does not own any Spanish builders in 120 million euros ($164 million) of assets under management.
Shares in builders have lost around 80 percent of their value since their boom years peak but they put on a good performance in 2013, with Sacyr leading the pack up 140 percent compared to a 21 percent rise in Spain's blue-chip index.
FCC shares have risen by 17 percent since Microsoft founder Gates bought a 6 percent stake in the building and services company for 113.5 million euros in October.
Billionaire investor Soros has also acquired a 3 percent stake in the company a source familiar with the matter has told Reuters, although neither party has yet confirmed this.
Although the builders have made headway in reducing loans, with ACS for example cutting debt by nearly half in the 12 months to September to 5.3 billion euros ($7.2 billion), most still have eye-watering net debt to core earnings ratios - a measure of a company's ability to decrease borrowings.
This ratio varies from 11 to 62 for the Spain's six biggest builders, according to ThomsonReuters data, against an industry median of 6.
The investment made through Gates' funds Cascade Investment and the Bill & Melinda Gates Foundation Trust was only a tiny fraction of the billionaire' s wealth, but some bankers were surprised by the purchase.
They say there are better ways to invest in Spanish builders, through debt rather than their equity.
Hedge funds are mopping up deeply discounted company debt from banks during restructuring as the returns are more assured than buying a volatile share from a company whose future depends on restructuring its debt.
FCC is on the cusp of renegotiating around 5 billion euros of loans with 37 creditor banks, one of the biggest such deals in recent years in Spain.
"There are smarter ways to invest in these companies - through their debt for example, rather than through the equity with the debt on the top," said one senior Madrid-based banker.
Progress on debt reduction is largely thanks to asset sales as creditor banks demand that everything be considered for sale if loans are to be rolled over, bankers say.
Sacyr and ACS have made painful adjustments for their stakes in Spanish oil major Repsol and energy utility Iberdrola, both bought at the height of the boom and a legacy from when builders, flush with cash, sought to increase holdings in other companies.
Sacyr and FCC have put their real estate units up for sale. Sacyr has already docked subsidiary Vallehermoso's debt from its balance sheet by offering it for sale and FCC has appointed Goldman Sachs to sell its stake in Realia.
Revenue in Spain's construction industry was down 11 percent in the first nine months of 2013 compared to 2012 figures that were already at record lows, according to official data.
Both Sacyr and FCC blamed falling Spanish investment in public works for year-on-year declines in sales for the first nine months of the year.
The decline comes despite increasing business from overseas contracts. Sacyr's international sales and FCC's Latin American income grew by nearly a quarter.
Spanish companies have won high-profile construction contracts across the world including a 6 billion euro contract for a metro in Riyadh, Saudi Arabia awarded to a consortium led by FCC to OHL's 1.95 billion euro contract and a 390-km-long railway in northern Siberia.
The government swiftly became involved in a dispute over cost overruns in a project to widen the Panama Canal involving a consortium led by Sacyr, a sign of the importance of foreign markets for Spanish builders.
Public Works Minister Ana Pastor flew out to Panama to mediate the dispute earlier this month. Spanish builders took on 35 billion euros of overseas contracts in 2013, according to official data, up from 23.4 billion in 2012.
But the companies remain dependent on Spain for the bulk of revenues. Around 45 percent of Sacyr's income is from Spain, 61 percent of FCC's and 15 percent of ACS's.
The government expects Spain's economic output to grow 0.3 percent in the fourth quarter, the biggest increase since the downturn started in 2008, but analysts say it will be a muted, drawn-out recovery.
"The stock price rises have been more to do with the improved health of balance sheets," said Lardies of Banco Madrid. "A return to health of the Spanish construction sector still looks a long way off."
FCC is forecast to have made a 38.7 million euro loss for 2013 due to writedowns on its renewable business and Austrian building unit, according to Starmine SmartEstimates.
Sacyr is expected to have returned to a net profit, of 117.4 million euros, after making a loss in 2012 due to the writedown of its stake in Repsol, according to an aggregate of top-rated forecasts. ACS will post modest gains for a net profit of 726.4 million euros.