DEBT CRISIS

Companies test the lending tap after easing of risk premium

Spanish firms seize window of opportunity to improve their liquidity situation

State lender Instituto de Crédito Oficial (ICO) on Monday became the latest large Spanish company to test the waters of the wholesale funding market in the wake of the easing of Spain’s risk premium, sparked by the European Central Bank’s decision to renew its bond-purchasing program.

According to Bloomberg, the ICO is looking to sell debt maturing in 2016 at a premium to the current yield of 3.8 percent in the secondary market for paper of the same maturity.

ECB President Mario Draghi’s plan to help financially stressed euro-zone countries such as Spain lower their borrowing costs saw the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent ease by over 80 basis points on Thursday and Friday. The weekly fall of 140 basis points was the biggest since the euro came into existence. The risk premium on Monday was up five basis points at 418, but still at a level last seen about five months ago having hit a euro-era record high of 650 basis points in July.

Other major Spanish companies who have seen a renewed window of opportunity to tap the wholesale markets include power utility Iberdrola, which is issuing five-year debt at 375 basis points above the midswap reference rate.

If they don’t try to issue now it could be difficult later since the political situation can derail"

Bank BBVA has found demand for an issue of one billion euros of three-year bonds, while Santander on Friday issued 2.5 billion euros in four year bonds at a rate of 4.625 percent. That was Santander’s second placement after having been kept at an arm’s length from the wholesale market for several months.

Elsewhere in the banking sector, Bloomberg quoted a banker familiar with the deal as saying that Santander unit Banesto on Monday offered covered notes maturing in 2017 at a yield of 395 basis points above the benchmark reference rate. Banco Sabadell plans on Tuesday to market two-year bonds at a premium of 375 basis points to the midswap rate.

“Core covered bonds are at an all-time yield low, so investors that believe that the ECB support will work in a search for yield,” Bloomberg quoted Bernd Volk, the head of covered bonds and agency research at Deutsche Bank in Frankfurt as saying.

“On the sell side, if Spanish issuers don’t try to issue now it could be difficult later since the political situation can derail easily,” Volk said, adding that he does not expect this scenario.

Last Wednesday, telecoms giant Telefónica sold one billion euros in five-year bonds in an issue that saw heavy demand. The yield offered was 5.811 percent, about one percentage point above what the Treasury is now paying for government bonds of the same maturity.

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