Spain’s Navarra Bank Debuts Covered Bonds as Issuance Recovers

Caja Rural de Navarra is issuing the Spanish savings bank’s first covered bonds backed by residential and commercial mortgages as sales of secured debt by the nation’s lenders increase.

Navarra cut the yield it’s offering on the 500 million euros ($647.5 million) of five-year bonds to 200 basis points more than swaps from about 215 basis points initially marketed, according to people familiar with the deal. The average spread investors demand to hold Spanish covered notes has fallen to 198 basis points, near the lowest in three years, according to Bank of America Merrill Lynch index data.

Issuance of the debt by Spanish lenders is recovering after collapsing when the nation’s property bubble burst and the mortgage market shrank. A total 9 billion euros of the notes have been sold this year, compared with 10 billion euros for the whole of 2012, according to Credit Agricole SA.

“It’s a positive signal that smaller Spanish savings banks can fund themselves in the wholesale market,” said Maureen Schuller, a covered bond analyst at ING Groep NV in Amsterdam. “Tighter sovereign spreads have made it easier for these issuers to come to market.”

Spain’s 10-year bond yield has dropped to 4.38 percent, holding near the 2 1/2-year low of 3.94 percent reached on May 3, and down from a euro-era record of 7.75 percent in July after Prime Minister Mariano Rajoy requested a financial package for the nation’s banks from the European Union.

Higher Ratings

Covered bonds typically pay less interest and get higher credit ratings than unsecured debt because they are backed by a pool of mortgages or public sector loans on top of the issuer guarantee. About 70 percent of the cover pool for Navarra’s bonds is made up of residential mortgages, Moody’s Investors Service reported earlier this month.

“The main reason why we are doing this issue is to diversify our funding base,” said Miguel Garcia de Eulate Martin-Moro, head of treasury at Pamplona-based Caja Rural de Navarra. “We have been able to tighten the pricing of the bond because of huge demand, more than double the size of the intended issue.”

Elsewhere in European credit markets, Spanish utility Iberdrola SA is selling 600 million euros of bonds due November 2020 that will yield 158 basis points more than swaps, according to people familiar with the transaction. It’s the Bilbao-based company’s first fundraising since February, data compiled by Bloomberg show.

Tobacco Bonds

Philip Morris International Inc., the world’s largest publicly traded tobacco company, is raising 500 million euros from 20-year securities yielding 90 basis points more than swaps. The New York-based company raised 2 billion euros in the common currency from bonds this year, Bloomberg data show.

Italy’s biggest utility, Enel SpA hired banks for a potential sale of as much as $6.5 billion of hybrid bonds in euros, dollars and pounds, joining companies such as Iberdrola and Electricite de France SA seeking to shore up credit ratings with securities that combine debt with equity. Companies sold a record 17 billion euros of hybrid securities in Europe this year, according to data compiled by Bloomberg.

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