The Spanish
government’s plan to sell about 14 billion euros ($19 billion) of bonds to pay
debt owed to the country’s biggest power companies may helpIberdrola SAandEnel
SpAavoid credit-rating downgrades.
The bonds,
whose proceeds will be used to pay back utilities for subsidizing power rates,
are being marketed this week to investors by bankers at Deutsche Bank AG,
Goldman Sachs Group Inc. and four other firms. The sale comes after Moody’s
Investors Service lowered the country’s credit rating to Aa1 from Aaa on Sept.
30 and said the outlook is “stable.”
“This will
be a watershed,” saidRaimundo Fernandez- Cuesta, a utilities analyst at
Nomura International Plc in
Madrid
. “It will put to bed fears” of
potential downgrades for
Iberdrola
and Enel, he said.
The
government hasn’t sold bonds to reimburse utilities since before September 2008
when New York-based investment bank Lehman Brothers Holdings Inc. collapsed.
Spain
, like the rest of the so-called
euro peripherals, is under pressure to reduce its budget deficit without
strangling the economy. Finance MinisterElena Salgadoforecasts the
economy will grow 1.3 percent next year, more than twice the 0.6 percent
estimated by the International Monetary Fund.
Iberdrola
and Enel’s Endesa unit,
Spain
’s biggest power producers, are owed
3.7 billion euros and 7.7 billion euros, respectively, after using their cash
and debt to cover the gap between revenue they receive from customers and what
has been promised by the government. About 3 billion euros is owed to other
Spanish utilities, including the local units of E.ON AG and EDP-Energias de
Portugal SA.
Moody’s
Review
A
successful sale by the government “will take off a lot of the pressure” for
Iberdrola and Enel, saidNeil Beddall, a credit analyst at Barclays
Capital in
London
. Moody’s has Bilbao, Spain-based Iberdrola’s A3 rating, the
seventh-highest investment grade, and Enel’s A2 grade under review for possible
cuts. Iberdrola was placed on negative watch July 5 after the government
postponed an increase in power prices.
Iberdrola
bondholders currently demand an interest rate for five-year debt that’s more
like a lower-rated company. Iberdrola’s 7.5 percent bonds due November 2015
currently trade at 158 basis points more than government debt, data compiled by
Bloomberg show. That’s 52 basis points more than the average yield premium for
five-year debt of similarly rated European industrial companies, according to
Bank of America Merrill Lynch index data.
The Spanish
utility’s five-year notes trade 17 basis points less than the spread investors
demand for BBB rated 2015 notes, Merrill Lynch indexes show. The 5.25 percent
notes of Italy’s Enel due in January 2015 currently trade 5 basis points wider
than Iberdrola’s, according to Bloomberg data.
Electricity
Debt
The debt of
all Spanish utilities from delayed electricity payments, including the local
units of E.ON and EDP-Energias de Portugal, was 14.6 billion euros at the end
of 2009, government reports show.
Spanish
utilities got into this position after the government, led by SocialistPrime
Minister Jose Luis Rodriguez Zapatero, refused to set power prices high enough
to cover costs, including renewable-energy subsidies.
The money
raised in bond sales will repay power companies that were forced to keep down
rates -- also known as tariffs -- for most of the past decade. The government
relied on utility subsidies to bolster the economy. From 2002 to 2006,
Spain
accounted for half of the new jobs
created in the euro region.
Negative
Watch
An Enel
spokesman didn’t respond to requests for comment.The companyhas
been on negative watch at Moody’s since April 2009 after the company bought an
additional 25 percent of Madrid-based Endesa from Acciona SA.
Iberdrola
officials referred to statements from July by Chief Executive OfficerJose
Ignacio Sanchez Galanwhen he said the company may have sell assets to
shore up its balance sheet.
The debt
sale “has to be done and it has to be done quickly,” Galan said on a July 21
conference call with analysts. “We’re doing as much as we possibly can to speed
things up at all levels.”
Standard
& Poor’s A- credit ratings for Iberdrola and Enel assume both will
strengthen their balance sheets over the next year by generating cash through a
securitization of tariff- deficit debt or by selling assets. Should they fail
to make sufficient progress, S&P may review the rating, analystLeigh
Baileysaid in a Sept. 21 telephone interview.
Under the
government’s plan, power companies will sell their entitlements from the tariff
deficit to a fund managed by Titulizacion de Activos SGFT SA. TDA will then
sell bonds backed by those assets and guaranteed by the Spanish treasury. Interest
and principal payments on the bond will be covered by revenue from a surcharge
on future Spanish power bills.
‘Direct
Reduction’
“It’s a
direct reduction of debt” for the utilities, said Beddall of Barclays. “It
demonstrates that the Spanish government is far more likely to securitize the
whole amount.”
Bonds of
European power companies rallied in the six months since the European Union
announced its 750 billion-euro bailout package for the euro region, easing
investor concern about possible defaults in countries such as
Greece
.
The extra
yield investors demand for holding 10-yearSpanish bondsrather than
German bunds fell 0.5 of a basis point yesterday to 180.1 basis points,
according to Bloomberg data. The gap was as wide as 221 basis points on June
16. The yield premium for 10-year Greek bonds was 786 basis points more than
Germany
, the most of any euro nation.
Under
Spanish law, the government sets power prices for most consumers based on the
expected wholesale cost of electricity, plus the subsidies allocated for
renewable energy sources such as wind and solar power. The government has set
prices below the overall cost of producing power each year since 2005 to win
support from electricity users, according to a report by Madrid-based
Intermoney Energia SA.