IFR-COMMENT: Santander blip an ominous sign for Spanish market

Thu Jun 2, 2011 9:14am EDT

by Aimee Donnellan

LONDON, June 2 (IFR) - A poorly received EUR1bn five-year covered bond issue for Banco Santander highlighted how investor appetite for Spanish names has changed since the country's was hit by renewed sovereign concerns last week.

This could make access by the second tier banks from the country even more difficult, at a time when they need to access the market in order to refinance upcoming maturities. The Santander (SAN.MC) deal was barely oversubscribed despite paying a 20bp new issue premium over its secondary curve.

This was in sharp contrast with a EUR2bn four-year Cedulas Hipotecarias sold in March which attracted an order book of EUR4.5bn from 200 accounts and priced at 180bp over mid-swaps.

The Santander trade was the first issue from a Spanish bank since renewed concerns about the Eurozone periphery hit spreads last week. Since March 24, Spanish government bonds have widened out and gone from mid-swaps plus 110bp to mid-swaps plus 190bp on Monday. It has since recovered and prospects could improve further following a successful auction on Thursday morning.

However, bankers are still worried and Santander's struggle to open the market has effectively could shut down smaller institutions' prospects for the near future.

"Santander has really disrupted the market," said a DCM banker. "When you have such a badly managed deal it makes you wonder when we will see a weaker peripheral issuer come to the market."

"Sometimes issuers think putting a trade into the market shows its strength but there is nothing wrong with being prudent. I think if more due diligence had been done it would have performed better," said a separate banker.

One Caja issuer who discussed the market on the condition of anonymity echoed that sentiment and said: "Secondary spreads are back to historical highs. We need the Greek uncertainty to be solved before investor appetite comes back."

UNDER PRESSURE

The renewed worries could not have come at a worse time. A research note published by JP Morgan last Friday warned that although Spanish banks had built a liquidity cushion of EUR8bn this the beginning of the year, it "covers only half of the EUR16bn of maturing Spanish bank debt over the next three months."

JP Morgan analysts wrote that while Santander and BBVA (BBVA.MC) had already refinanced this year' maturities, the picture away from them was less encouraging.

"Smaller Spanish banks struggled during April, as both net debt issuance and access to the domestic repo market, i.e. MeffRepo, declined," they wrote. "This suggests that Spanish bank borrowing from the ECB likely increased to end- April, by more than the EUR4bn already reported by the central bank based on a monthly average for the month."

This would interrupt a nine-month run of decreases in the ECB borrowing by Spanish banks, they wrote.

"Negative net bond issuance for three months in a row suggests that access to debt capital markets has again turned more difficult for smaller Spanish banks," they wrote. "And this is where the vulnerability lies with Spain. While the biggest Spanish banks continue to enjoy good access to both debt capital markets and central counterparty international repo platforms such as LCH and Eurex, the smaller Spanish banks are finding it more difficult to access funding markets, risking further increases in their ECB borrowing in coming months."

LESS INTERNATIONAL DEMAND

In the government market, the Spanish government has sold EUR43bn of bonds, 46% of the EUR94bn planned for the year. Worryingly the participation from international investors has declined to 41.5% at the end of February from 44.5% at the end of 2010. "The Spanish government is becoming more reliant on domestic investors to sell its bonds," said JP Morgan's Grace Koo.

For Spanish covered bonds the issue of lack of international participation has also escalated. Looking at Santander's recent five year domestic accounts provided the highest amount of interest, whereas its previous five-year covered bond which was sold in January saw French distribution exceeding all others.

"I think this shows that we are in a very different market than we were in January," said one DCM banker.

(Aimee Donnellan is a reporter for International Financing Review, a Thomson Reuters publication)