Spain Offers Premium to Existing Debt for New 10-Year Bond Sale

Spain is having to offer a premium over its existing debt to sell new 10-year bonds as Europe’s sovereign deficit crisis pushes up borrowing costs.

The nation, which is planning a gross 93.8 billion euros ($125 billion) of bond issuance this year, is selling the notes through a group of banks and canceled two auctions scheduled for Jan. 20, according to the Treasury’s website. The bonds will be priced to yield 225 basis points more than the mid-swap rate, said two people familiar with the matter, which equates to about 12 basis points over Spain’s existing 4.85 percent October 2020 securities.

Spain faces surging borrowing costs as it attempts to convince investors it can rein in the euro region’s third- largest budget deficit while shoring up its struggling savings banks. The cost of insuring its debt surged, with credit-default swaps on the nation jumping from the lowest in six weeks.

“Spain has a lot of issuance to do in 2011 and they want to secure as much funding as soon as possible in January,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “There aren’t any other peripheral auctions this week,” reducing competition, he said.

Spain’s new notes due April 2021 will be of a similar size to a bond issue in January 2010, when the Treasury sold 5 billion euros, said a finance ministry official, who declined to be identified citing government policy. The official couldn’t confirm or deny the so-called price whisper. The deal has attracted more than 6 billion euros of orders and is due to be priced today, said the people familiar with the matter.

‘Desperation Signal’
“The spread looks fair, if they gave more premium they’d be sending a desperation signal to the market,” said Ivan Comerma, who manages about 2 billion euros as head of treasury at Banc International-Banca Mora in Andorra.

Default swaps tied to Spain’s bonds snapped four days of declines, climbing 5.5 basis points to 300, according to CMA. The contracts reached a record-high 364 on Nov. 30.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A decline signals an improvement in investors’ perceptions of credit quality.

Canceling the auctions of 2020 and 2024 bonds was probably an attempt to prevent over-supply in the long-term sovereign bond market, said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London.
Belgium is also planning a sale of 10-year bonds via a bank syndicate this month depending on market conditions, according to Anne LeClercq, director for treasury and capital markets at the nation’s debt agency.

Barclays Capital, BBVA, BNP Paribas SA, Citigroup Inc., Banco Santander SA and Societe Generale SA are managing Spain’s debt sale, said the people familiar with the transaction, who declined to be identified because the details are private.

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net