Spanish banks face funding lock-out

Covered bond syndicate bankers are expecting weak jobs data out of the US and a persistent deterioration of Spanish bank credit to weigh heavily on the new issue market for the foreseeable future. It's a backdrop that is likely to lock Spanish banks out of the primary market and deprive the country's banks of a funding plan B, according to one banker.  Click here for Cloud Computing     Also Read   Related Stories News Now - Spanish banks' ECB borrowings on the rise - US money funds shun Italian, Spanish banks - Salgado's 'nightmares' over as Spain tackles banks - Credit Agricole unit, Magnetar sued - Constructive on Indian market: Deutsche Bank - Moody's threatens to downgrade 17 big banks "The Spanish are continuously looking at the market but the increasing weakness in the government spreads and the confusion around the M&A sector is putting a number of investors off." Investors are now focusing on the technical difficulties in the Spanish real estate and government bond markets -- which are not likely to be solved by austerity cuts or euro 1 trn of fresh liquidity through twin three-year funding operations, or LTROs. Last week, Moody's said that new mortgage lending in Spain is not strong enough to offset redemptions and bad loans. According to Credit Agricole, this drastic decline in mortgage lending will reduce the over-collateralisation that protects covered bondholders. This is especially the case for issuers that are close to the statutory limit of 25 per cent. "Moody's has highlighted that Spain will not be able to keep up with its redemptions and that is something that will keep Spanish banks locked out of the market for a prolonged period of time," said a syndicate banker. In the secondary market, traders say Spanish spreads have widened by as much as 70bp in the past two weeks, compared to French and Nordic bonds that have softened by 20bp and 3bp respectively. "The Spanish are completely shut out of the market," said a covered bond trader. "You won't get any momentum for a deal, and for investors, they have no incentive to buy into a deal when the market is declining." Banco Popular's five-year Cedulas is now trading at mid-swaps plus 286bp, having priced at plus 255bp in March, and the last senior deal, a five-year from Santander, is some 88bp wider than its mid-swaps plus 265bp reoffer level. The drop-off in demand for Spanish paper follows two months of relatively energetic issuing activity from the country's banks which had been locked out of the market for the previous eight months. Since Santander sold a euro 2 bn, three-year Cedulas Hipotecarias at mid-swaps plus 210bp in February, Spanish banks have come to the market in an orderly fashion and sold around euro 4.8 bn. And while certain bankers are bearish on Spain's public funding prospects there are those that think a few weeks without primary supply from the country and investors will jump at the chance to buy Cedulas paper. "The widening is way overdone," said one banker. " If we have no new issuance for a few weeks investors will be tripping over themselves to put their cash to work and I think this implies Santander, BBVA and CaixaBank." The government also stated its intent to accelerate the sale of publicly-owned savings banks. Added to this, are reports that Spanish banks raised their holding of government debt to euro 68 bn under the LTRO, thus closely linking the health of the banking sector to the fate of the governments debt, and with more concerns on the Spanish budget deficit that is affecting sentiment. On the back of that news, Spanish government bonds have widened by 25bp on Tuesday which is now trickling down to Spanish covered bond issuers who are sidelined despite having plans to access the market in the near future. "It's not at all clear to investors what banks are healthy in the country. There is much needed consolidation going on but it is having an impact on how the credit is perceived," said a syndicate official. According to a Spanish bank treasurer, there is a short-term problem for investors seeking information about certain credits that have undergone, and are undergoing, consolidation. "There are different software systems providing mortgage portfolio information in an aggregated format which is more difficult than before a merger. This happens every time two institutions merge and it takes 12 to 24 months to migrate all systems into a single IT system," he said. In the US, weakness in non-farm payroll numbers has also unsettled market participants. US jobs grew by 120,000 last month, far below the forecast gain of 203,000 jobs. The unemployment rate dipped to 8.2 per cent, down from 8.3 per cent in February.

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