All hail the kingdom
Spain staged a remarkable turnround in 2013, soothing investor nerves about imbalances in its economy and scaling a mammoth funding wall with some impressive sales of new long-term debt. For coming back from the brink to outperform its peers, the Kingdom of Spain is IFR’s SSAR issuer of the Year.
It is easy to forget that Spain was front and centre of eurozone sovereign debt concerns just last year.
Buffeted by a property crash that spilled over into the banking sector, the country had a frightening €121bn of debt to issue in 2013. But the government put its house in order, enacting structural reforms to reduce the deficit, clean up the financial sector, simplify labour contracts, and get back to current account surplus.
Market access, the first major hurdle, was central to the turnaround – and from the outset the cards were not in Spain’s favour. Unlike equally troubled Italy, Spain did not have much in the way of a domestic investor base to fall back on – so luring back foreign accounts was critical.
And under new eurozone protocols, Spain had to raise at least 55% of monies via bonds with collective action clauses, which many felt would lead investors to demand higher returns. This meant issuing multiple new lines at auction, and returning to syndicated markets for more challenging long-term debt.
Early start
Spain had already issued around €10bn of debt via auctions when it announced its first syndication in the 10-year maturity in January. More than €23bn of orders allowed it to price a €7bn bond – one of the largest single-tranche sovereigns since the eurozone crisis began.
Around 60% was placed outside Spain, which was impressive, but only 3% to investors in the Americas, which was not.
The Tesoro then decided to broaden its reach on the other side of the Atlantic with its first US dollar trade since September 2009. Of the US$2bn of five-year paper issued, around half went to the targeted US accounts. By the end of February, Spain had met around 25% of its funding needs. In May it returned to syndicated markets with another €7bn 10-year.
The next task was to extend duration. Italy had priced a 15-year bond in January, and Spain came with an identical issue. The 5.15% coupon attracted demand from 130 accounts with over €7.5bn of orders.
Again, most of the bonds were placed outside Spain – mainly to European real money but now to some opportunistic US hedge funds as well.
Emboldened by the demand, Spain then stretched out to a 30-year tenor for the first time in more than four years. This also repeated an Italian deal. But while a chunk of Italy’s issue was reportedly sold to one large domestic investor, Spain got 65% of the paper placed outside the country. The €4bn 30-year attracted nearly €11bn of orders from 193 accounts. It priced with the same coupon as the 15-year deal, 5.15%. By September, Spanish 10-year paper was trading through the Italian equivalent for the first time in 18 months.
The 30-year marked Spain’s return to the international stage in earnest. And the response was so strong that the Tesoro made plans for a 50-year, its longest ever, in the months ahead. But that is set for 2014; Spain had completed its 2013 funding programme by the end of November.
Looking ahead
With domestic banks paring government holdings ahead of stress tests in 2014, international real money could provide an important buffer for Spanish yields in the months to come. ECB data showed Spanish banks offloaded €8.9bn of government bonds in October, and €3.4bn in September.
The Spanish economy is, of course, still on shaky ground. A strong, sustained recovery is some way off. Domestic demand is weak and unemployment sky-high.
But fears around its banks have receded, and analysts think it will be better placed than many peers for the ECB’s asset quality review. Eurozone finance ministers have allowed Spain to exit its bank bailout programme, with just €41bn of the available €100bn having to be drawn down.
Next year around €140bn will need to be refinanced, before any additional funding. However, with improved investor confidence, the country heads into 2014 in much better health.
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