Madrid Looks to Boost Bond Sales as Investors Seek YieldsEsteban Duarte and Angeline Benoit
Madrid, a Spanish region with a smaller budget deficit than top-rated Finland and an economy about the same size, is considering increasing bond sales to take advantage of strong investor demand.
“The price and volume of our recent operations show the market is confident in Madrid and other solvent regions,” Finance Chief Enrique Ossorio Crespo said in an interview in his office in Madrid on Feb. 17. The region may sell more bonds and raise less money through bank loans, he said.
Investors are returning to the euro region’s so-called periphery amid signs that its debt crisis is abating and the economic recovery is gathering pace. Offering higher returns than Spain, which carries the same credit ratings, Madrid is tapping a rally dominated by the search for extra yield amid unprecedented central-bank stimulus measures.
Spain’s 10-year benchmark bonds fell for the first time in five days today, sending the yield up 4 basis points to 3.56 percent at 12:52 p.m. in London. The yield on Madrid’s bond of equal maturity rose 1 basis point to 4.04 percent while it was unchanged from yesterday at 2.68 percent on a note maturing in April 2019, compared with 2.09 percent for the sovereign five-year benchmark.
“Spain will sell bonds tomorrow and what’s more, the region of Madrid announced that it plans to increase bond sales this year,” said Felix Herrmann, a research analyst at DZ Bank AG in Frankfurt. “There could be a general tendency for profit taking after several days of spread tightening.”
The region, which plans to raise a total of 5.6 billion euros ($7.7 billion) of debt this year, is about 250 million euros away from its initial issuance target for bonds after collecting almost 3.1 billion euros in four transactions. Madrid had planned to cover 60 percent of its borrowing needs with bonds and 40 percent with loans.
“Given circumstances, we could change the strategy we set at the beginning of the year,” Ossorio said. “We may or may not respect that proportion if we change our plans to increase bond issuance in public or private placements.”
Madrid, the second-largest contributor to Spain’s economy and its least-indebted region, faces 3.6 billion euros of debt maturities this year, of which 3 billion euros have already been financed with public bond sales.
It sold 1.4 billion euros of bonds due in 2019 in January and raised 1.6 billion euros last week, when it issued securities maturing in 2024, data compiled by Bloomberg show. The region collected another 88 million euros via private deals due in 22 and 30 years.
“We are working on the possibility of making bigger deals with durations” similar to the completed private placements, Ossorio said. The average life of existing debt currently is at about six years, he said.
The region, which is rated at the lowest investment grade by Standard & Poor’s, needs to finance a deficit of 1.9 billion euros, or 1 percent of its gross domestic product. It is still waiting for an authorization by the central government to borrow the amount. Spain carries the same BBB- rating.
Last year, overspending in the region reached 1.03 percent of output, less than the 1.07 percent limit set by the state. That compares with estimated shortfalls of 6.5 percent of GDP in Spain and 2.6 percent in Finland, which has an AAA rating from S&P.
“The Madrid accounts are in better shape than other Spanish regions,” said Ossorio. “As 70 percent of our revenue depends on the Spanish state, we can’t be rated above the sovereign.”
Madrid, which predicts it’ll grow more than twice the nationwide pace of 0.7 percent this year, will meet its 2014 budget-deficit goal even as it receives less money from the central government, Ossorio said.
Prime Minister Mariano Rajoy is due to overhaul the nation’s tax and regional funding systems before the end of his term in 2015. Ossorio said he should consider joint bond issuances for the 17 semi-autonomous regions, a funding system similar to that of Germany’s federal states, and an increase in the regions’ share of national tax receipts.