Spain Poised for a Cut to Junk as Default Swaps Near Records
Spain is poised for a downgrade to junk by Moody’s Investors Service, according to investors who sent the cost of default insurance for the nation’s biggest banks and companies close to record highs.
Credit-default swaps on Banco Santander SA (SAN), the country’s biggest bank, jumped 23 percent this quarter to 454 basis points, compared with an all-time high of 474 in November. Banco Bilbao Vizcaya Argentaria SA (BBVA) rose 26 percent to 477, approaching May’s record 516, while phone company Telefonica SA (TEF) surged 70 percent to a record 540 basis points.
Moody’s downgraded 28 Spanish banks yesterday including a two-step cut for Banco Santander and a three-level reduction for BBVA, a week after it lowered Spain’s rating to Baa3, on the cusp of junk. The country remains on review for another cut by New York-based Moody’s after it sought a 100 billion-euro ($125 billion) international bailout for its banks and on speculation losses from its real estate industry will worsen.
“There’s more to come if Moody’s downgrades the sovereign as we expect in the next few weeks,” said Suki Mann, a credit analyst at Societe Generale SA in London. “A one-notch move to Ba1 will likely see all the country’s banking system in junk territory, with the possible exception of Santander.”
Spanish bank bonds are the worst performing among European financial companies this month, losing 0.75 percent on average, according to Bank of America Merrill Lynch’s Euro Corporates Banking index of 742 securities. Debt tracked by the gauge returned 0.53 percent overall, with Italian bank bonds earning 0.27 percent and German securities making 0.19 percent.
Santander’s credit-default swaps declined two basis points to 451 basis points today, and BBVA’s fell three basis points to 478 basis points.
Bond spreads are widening, signaling potentially higher borrowing cost for the country’s largest lenders. Santander’s 1 billion euros of 4 percent notes due 2017 are quoted at 559 basis points above the safest government bonds compared with a 553 basis-point spread yesterday, according to Bloomberg Bond Trader bid prices. BBVA’s 500 million euros of 4.875 percent bonds due 2016 are quoted at 578 basis points from 567 basis points yesterday.
The yield premium on Spanish bank bonds jumped to 648 basis points, or 6.48 percentage points, relative to German government debt, from 433 basis points at the end of the March, the Bank of America Merrill Lynch data show. That compares with 291 basis points on average for debt tracked by the bank bond index.
Moody’s cut at least a dozen Spanish lenders to junk status, and in all cases the ratings remained under review for further downgrades, the ratings company said yesterday in a statement. Junk debt is graded below Baa3 by Moody’s and BBB- by Standard & Poor’s and Fitch Ratings.
The latest downgrades reflect the government’s reduced creditworthiness, which lessens its ability to support the lenders, as well as Moody’s expectation that losses linked to commercial property will keep rising, according to yesterday’s statement.
“We suspect that the sovereign will itself require a bailout, not just the Spanish banks,” said Olly Burrows, a London-based credit analyst at Rabobank International.
To contact the reporter on this story: Esteban Duarte in Madrid at email@example.com