Spain fears threaten corporate funding and profits

MADRID
FEARS that Spain may suffer a similar debt crisis to Greece are raising funding costs for companies and threatening to stifle profits, squeeze investment in acquisitions and constrain research.

Analysts say new corporate debt issues will have to offer substantially higher yields, and the cost of debt from wholesale markets would be directly linked to trading on the secondary bond markets, significantly costlier than a few months ago. “There's a good reason to be concerned because as sovereign spreads go wider, it's raising the cost of funding for corporates,” said Aziz Sunderji, credit strategist at Barclays Capital.

The premium investors demand to hold 10-year Spanish bonds rather than benchmark German government bonds rose to a new euro-lifetime high of 150 basis points on Thursday as investors fretted Spain would need a Greek-style bailout.

Credit Suisse estimates this spread should be about 300 basis points higher, based on the country's risk score. Corporate bond spreads are likely to track sovereign's higher.

Funding costs have even risen for heavyweight Spanish companies like banks Santander and BBVA and concessions group Ferrovial and utility Iberdrola companies who have limited exposure to the Spanish economy after a decade of diversification.

Santander, the euro-zone's biggest bank with just 24 percent of its profit from Spain, said last week sovereign fears on Spain were pushing up funding costs in the wholesale markets amounting to around 20 basis points on new issues.

Antonio Ramirez, analyst at Keefe, Bruyette & Woods, pointed out this figure was based on deals during the year to date and would get even less favorable as spreads on Spanish bonds widened. “If the reason for them to pay a little more was the sovereign, and today the sovereign is more costly than it has been in the first quarter, you would assume this trend is not getting better, it is getting worse,” he said.

Banks are the worst affected by cuts to sovereign ratings because of implicit government backing for its financial system. “Banks are a leveraged play on an economy. In that respect they are going to reflect concerns on an economy first,” said Daragh Quinn, analyst at Nomura.

Santander Chief Executive Officer Alfredo Saenz said last week the bank was well funded and a price war on high-interest deposit accounts amongst Spanish banks was aimed at capturing market share rather than securing funding.

But some analysts believe a rush by Spanish lenders to attract retail deposits by offering interest rates as high as 4 percent is a way of securing funding in an uncertain economic climate. “We believe institutions are not so much concerned about gaining market share but about obtaining as much stable funding as possible,” said banking analyst Santiago Lopez.

Although the major companies like Telefonica and Repsol say they are well-financed and do not have to access the markets in the near future, Spanish companies as a whole have piled on debt over the past decade thanks to cheap credit and a booming home economy.