Spain's ICO to Issue 14.8 Billion Euros of Bonds Backed by Company Loans

Instituto de Credito Oficial, a Spanish government agency that lends to businesses, plans to issue 14.8 billion euros ($19.22 billion) of bonds backed by company loans.

Madrid-based ICO’s notes will be backed by 22.9 billion euros ($29.7 billion) of loans to companies, according to a Moody’s Investors Service report on the transaction. The securities will be issued through a special-purpose fund known as ICO Mediacion II AyT F.T.A., according to the ratings company’s statement.

Amid the financial crisis, Spanish banks have put together asset-backed bond issues that they don’t sell, instead using them as collateral for European Central Bank loans. The nation’s banks borrowed a record 126.3 billion euros from the ECB in June, according to data compiled by the Bank of Spain.

Spain’s financial companies are in the spotlight after five of the nation’s savings banks were among just seven lenders to fail the European Union’s stress tests, which were designed to gauge banks’ financial health. The sovereign deficit crisis that started in Greece in April and roiled markets throughout the region sparked concern that Spain’s banks faced losses on their government debt holdings, on top of the $565 billion European lenders have already lost or written down since 2007.

Extra Yield

The extra yield investors demand to hold 10-year Spanish government bonds instead of benchmark German bunds widened from 59 basis points on Dec. 31 to as much as 221 basis points on June 16, and was at 148 basis points at 5 p.m. in London today. A basis point is 0.01 percentage point.

The cost of insuring against losses on Spanish government debt using credit-default swaps fell 9 basis points to 193.5 today, the lowest level since May 19, according to data provider CMA. The contracts are down from a record 275 basis points May 6.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improvement in perceptions of credit quality.

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net;

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