On troubled waters

IFR Top 250 Borrowers 2010
5 min read

The Kingdom of Spain has suffered along with a number of other European sovereigns from the headwinds created by Greece’s recourse to an EU/IMF bail-out package. By announcing its own austerity measures to address its fiscal position, Spain has attempted to ensure its ability to access the market during a period of unprecedented turbulence. Michael Winfield reports.

At the beginning of 2010 Spain was rated Aaa/AA+/AAA and was able to access the market at 75bp over 10-year Bunds; four months later its credit rating was Aaa/AA/AAA and the spread to Germany had roughly doubled to plus 145bp.

During the intervening period, Spain had briefly traded as wide as plus 170bp. Rating levels took second place to fears of contagion from Greece, which had found itself unable to access the markets as a result of a large debt/GDP ratio. It had limited means to address this situation in a timeframe that would reassure investors.

In anticipation of a similar assessment being applied by the market, Spain introduced measures to calm investors’ nerves. Ultimately, however, it wasn’t until the ECB took action that investor fears were assuaged and spreads tightened again.

The fundamental problem for Spain was a rise in government issuance this year. That issuance was necessary to finance its coordinated action taken to support the economy, and fill the gap created by the economy’s reliance on the property and construction sectors, which have seen revenues fall. At the end of 2009 Spain’s budget deficit stood at 11.4% of GDP. That is forecast to fall to 9.8% this year, before reaching the 3% objective by the end of 2013.

Spain’s funding strategy is based on selling larger benchmark issues through syndication, which are then increased in size through regular auctions, providing a wide range of maturities out to 30-years. In 2009 Spain raised €116.7bn, of which total medium and long term debt was €82.3bn. This was forecast to fall to €76.8bn in total this year with €61.6bn medium or longer dated supply.

The largest issue it completed in the last year was a €7bn October 2019 Bono, priced at 78.6bp over Bunds in May 2009, followed by a €4.5bn July 2041 deal in the autumn. At the beginning of this year Spain renewed its 10-year benchmark with a €5bn April 2020 deal at 76bp over Bunds, attracting a final book size of €8bn. That was somewhat smaller than the previous 10-year deal which attracted over €15bn of interest.

In February Spain returned to the market with a €5bn July 2025 deal which attracted a book approaching €14bn in size. The timing of the issue coincided with a stable peripheral market backdrop, the market waiting for details of Greece’s plan to cut its budget deficit. “We are pleased to have completed two syndicated deals so far, as planned for the first quarter,” said Gonzalo Garcia Andres, head of funding. Both deals saw significant non-domestic placement of almost 70% on this occasion, he added.

Spainhas also been pursuing alternative funding strategies to diversify its available options: in March it raised €1.5bn in floating rate format at 45bp over three month Euribor. This followed a successful €3bn three-year trade sold by the Kingdom in the summer of 2009 at Euribor less 5bp. This amounted to a cost saving of about 3bp compared to conventional debt at the time after accounting for the threes/sixes basis swap. This trade, which attracted a final book of more than €2bn, appealed to a more diversified investor mix than the three-year transaction, with banks and private banks at 40%, asset managers 27%, insurance companies and pension funds 18% and central banks 15%. On this occasion, the 3% April 2015 Bono was quoted at about plus 37bp on an asset-swap basis. The cost of the Bono del Estado at three-month Euribor plus 45bp equated to plus 28bp on a six-month basis, or an all-in cost saving of about 7bp compared with conventional Bono issuance.

Spain has also tapped into US dollar demand for European sovereign names with the incremental advantage of swapping the proceeds back into euros, as well as the benefit of the threes/sixes swap helping reduce its overall cost of funding. In late February 2009 the sovereign sold a US$1bn three-year deal at mid-swaps plus 70bp, achieving a double digit cost saving in relation to conventional Bono issuance. It returned to the market with a similar structure in September 2009, this time raising US$2.5bn at a small concession to the previous issue and attracting a final book of over US$3bn. Spain is also been considering the issuance of inflation-linked debt, in common with its other European issuers such as Italy and France.