Banks priced the three-year bonds to yield 3.68 percentage points more than similar German government bonds, data compiled by Bloomberg show. The deal was the first part of a 22 billion- euro program that was suspended in November because of government debt market volatility. The notes are backed by revenue from consumer power bills and will reimburse utilities.
“The good news is there’s been a placement and the yield is reasonable given the situation,” said Ivan Comerma, who manages about 2 billion euros as head of treasury at Banc International Banca Mora in Andorra. “Many traders think there is no demand for Spain at any level, and this shows that there is.”
Prime Minister Jose Luis Rodriguez Zapatero is aiming to prove he can finance his commitments this year after bailing out the country’s savings banks, supporting 4.57 million unemployed workers and pledging to repay the power companies for helping subsidize electricity rates for a decade. Zapatero, 50, announced budget cuts in May as investors dumped Spanish bonds.
The yield on Spain’s benchmark 5-year government bond moved within a 0.75 percentage-point range during the last three weeks. That gave stability after bankers working for the government in November said rates were too volatile to sell the deal and investors sold Spanish debt over concerns that the country may struggle to finance itself in 2011.
Tariff Deficit
The government stopped Iberdrola SA, Endesa SA and Gas Natural SDG SA from charging customers enough to recover all of their approved costs. While the policy curbed consumer prices, the accrued debt will reach 22 billion euros by the end of 2012, the government forecast.
Last month the government announced it would breach the legal limits for the so-called tariff deficit, adding 5.5 billion euros to the debt last year compared with a ceiling of 3 billion euros. Enel SpA, Endesa’s Italian owner, was put under review for a possible downgrade last month by Moody’s Investors Service after Spain delayed the bond sale.
Zapatero has cut public wages, frozen pensions and scrapped an unemployment benefit for the long-term jobless in his attempt to slash the budget deficit to 6 percent of gross domestic product this year from 11 percent in 2009. He has angered his former allies in the unions by reducing the cost of firing workers and pledging to raise the retirement age.
‘Not Too Late’
“If Spain wants to get through this, they can,” said Axel Merk, president and chief investment officer of Palo Alto-based Merk Funds. “It’s not too late for them, but we do need to see some more serious efforts. In the absence of all that, slowly but surely the cost of borrowing will go up and it’s going to strangle” them.
The extra yield investors demand to hold 10-year Spanish government bonds rather than German bunds touched a record 298 basis points on Nov. 30 compared with an average of 15 basis points over the first decade of the monetary union. The spread fell 6 points yesterday to 255 points.
Investors who buy the power bonds will be paid with revenue from future electricity bills and will have an explicit guarantee from Spain’s government.
Spanish electricity consumers were charged lower rates than utilities were approved to receive, creating a so-called tariff deficit that the government has vowed to repay.
The sale was organized by Banco Bilbao Vizcaya Argentaria SA, BNP Paribas SA, Credit Agricole CIB, Deutsche Bank AG, Goldman Sachs Group Inc. and Banco Santander SA.
Investors placed more than 2.25 billion euros in orders, a banker working on the deal said.
Type of investors that bought bonds: Fund Managers: 57.9% Banks: 22.6% Insurance companies: 14.9% Other: 3.3% Central Banks: 0.5% Pension Funds: 0.5% Retail: 0.3% Country of investors: Spain: 63.6% Italy: 15.8% U.K.: 6.3% Ireland: 5.0% France: 4.0% Germany: 2.6% Other: 2.6% To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net Esteban Duarte in Madrid at eduarterubia@bloomberg.net
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