Spain’s Allure Unsullied by Bond Writedown Clauses: Euro Credit

Spain’s introduction of clauses that make debt restructuring easier is doing little to temper a rally that has pushed borrowing costs to an almost 10-month low.

That’s good news for Prime Minister Mariano Rajoy, who can still afford bond-market funding after last month reasserting his intention to avoid a European Central Bank bailout. Auctions tomorrow, Spain’s first of the year, include a new 2015 note with so-called collective-action clauses, which limit investors’ rights to oppose writedowns.

“The market is engaged in a hunt for yield,” said Russel Matthews, a fund manager at BlueBay Asset Management Ltd. in London, which oversees $47 billion and owns Spanish bonds. “There may be a lot of investors who are underinvested in risky assets and are afraid they are going to miss out on the rally. I don’t think CACs are making a major difference.”

The inclusion of the clauses, which were part of the agreement to establish a permanent rescue fund for the 17-nation currency union, allows a majority of bondholders to approve a debt restructuring if the issuing sovereign is at risk of default, while removing the right for individual investors to veto a rescheduling for their own holdings.

Euro Defense

Spain’s 10-year bond yield has tumbled from a euro-era record of 7.75 percent since ECB President Mario Draghi’s July 26 pledge to do “whatever it takes” to defend the euro, backed up in September by the announcement of a plan to buy short-dated securities of nations that request help.

Yields have dropped further since U.S. lawmakers reached an agreement to avert tax increases and spending cuts, boosting demand for higher-yielding assets. The 10-year Spanish rate was at 5.13 percent as of 12:28 p.m. London time, after touching 5.01 percent on Jan. 4, the lowest since March 12.

“CACs are a bit in the shadows and investors are ignoring their inclusion,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “Sentiment is quite strong at the moment for peripheral markets and investors are shrugging off the bad news and extrapolating the good news.”

Spanish debt maturing in a year or more gained 1.3 percent this month through Jan. 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds returned 1.2 percent, while German securities lost 1.1 percent.

Future Issues

Spain is also due to sell bonds maturing in 2018 and 2026 tomorrow. The nation plans to cut net bond issuance this year to 59 billion euros ($77.1 billion) from 62.7 billion euros last year, Treasury chief Inigo Fernandez de Mesa told reporters in Madrid yesterday. The initial target for 2012 net issuance was 35.8 billion euros.

All future new issues with a maturity of more than one year will includes CACs, Spain’s official gazette said on Jan. 3.

Greece introduced the provisions retroactively on its bonds last year to impose losses of 53.5 percent on private investors who wanted to opt out of the nation’s plan to cut its debt burden.

“I wonder whether investors would apportion too much weight to the difference between the CAC and non-CAC universes in light of that important precedent,” said Richard McGuire, a senior rates strategist at Rabobank International in London. “When a sovereign is no longer able to service its debt then perhaps the existence or not of CACs is something of a moot point.”

First Sale

In total, 45 percent of European bonds issued this year may be re-opens of pre-CAC government securities, Luca Jellinek, head of European fixed-income strategy at Credit Agricole Corporate & Investment Bank wrote in a Dec. 18 note citing European Commission figures. That will drop to 35 percent in 2015, 25 percent in 2018 and 5 percent by 2023, he wrote.

While Spain’s yields have tumbled in recent months, the nation’s economic woes are far from solved and its 10-year yields are still about above their average of 4.8 percent over the past five years.

Spain’s budget deficit was 9.4 percent of gross domestic product in 2011, the same as that of Greece. Spanish Deputy Budget Minister Marta Fernandez Curras said on Dec. 21 her nation will struggle to meet a 2012 target of 6.3 percent set by the European Union.

Spanish Regions

Data released last week by the Budget Ministry showed eight of Spain’s 17 semi-autonomous regions, responsible for the nation missing its deficit target in 2011, will probably miss their own targets for 2012.

The Organization for Economic Cooperation and Development predicts the Spanish economy will contract 1.4 percent this year after shrinking 1.3 percent last year, according to forecasts published on Nov. 27. It expects Europe’s fourth-largest economy to grow 0.5 percent in 2014.

“I don’t think CACs will make or break peripheral bond markets,” said Michael Riddell, a London-based fund manager at M&G Group Plc, which oversees about $324 billion. “Spain is insolvent so I refuse to touch it. If Spain could miraculously return to 3-4 percent nominal growth and run budget surpluses, then the presence of CACs wouldn’t stop me -- but that won’t happen.”

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