UPDATE 1-Spain preparing US dollar bond issue

(Adds background, investor comment)

By John Geddie

LONDON, Feb 19 (IFR) - Spain is preparing to issue a bond denominated in US dollars, possibly as early as this week, market sources said on Tuesday.

The eurozone peripheral sovereign, rated Baa3/BBB-/BBB, is working to get the appropriate documentation in place for a possible five-year deal, building on feedback from US investors during a roadshow last week.

"It seems like Spain wants to have a crack at dollars," said one bank origination official.

"It makes sense because our sales force in the US is saying there is definite interest for a dollar deal out of Spain."

Another market source said that Spain was looking but did not think it had yet awarded a bond mandate. A spokesperson for the Spanish Ministry of Economy and Finance declined to comment.

A SIDESHOW

The dollar market will enable Spain to diversify its investor base and tap into the largest community of yield-hungry emerging markets funds.

Eurozone peer Slovenia managed to do exactly that late last year, issuing a USD2.25bn 10-year bond in line with where its equivalent euro bonds were trading.

But while Slovenia was forced to dollars after euro investors shunned the country, Spain finds itself in a much stronger position.

Spain has already made significant inroads into its hefty EUR120bn funding programme for 2013, raising EUR22bn via a syndicated 10-year bond and a handful of auctions.

"It will be a sideshow, an opportunistic deal to relieve a bit of funding pressure...but Spain still need to be cognisant of the need for support from their home market," said a sovereign bond portfolio manager at a London-based fixed income fund.

"That said, if it came at the right levels and was attractively priced we would definitely look at investing in a dollar deal from Spain," he added.

Spain last issued a dollar-denominated bond back in September 2009 - a USD2.5bn 3-year priced at mid-swaps plus 18bp via Barclays, Credit Suisse and Goldman Sachs. (Reporting by John Geddie; editing by Alex Chambers)