Fears are growing over the outlook for the Spanish corporate bond market amid a vanishing investor base and a slowing economy, even as the eurozone summit’s green-light to the bank bailout plan has helped to shore up the government’s solvency.
Yields on Spanish corporate debt have widened dramatically since Marchand the cash curves of several corporates have started to invert at the long-end. Inverted cash curves are generally seen among corporates that are comfortably in high-yield territory or that have liquidity issues. Bank of America Merrill Lynch strategists have noted that the Spanish corporates with inverted yield curves are also those that have the largest refinancing needs.
Telefonica’s cash curve has inverted from the five-year onwards since March. The company has €16.5 billion of euro fixed-rate debt, €10.5 billion of which is due to mature by the end of 2014.
Similar problems can be seen at Iberdrola, an electric utility company, and Gas Natural, with €8.9 billion and €8.3 billion of debt outstanding respectively. Conversely, oil and gas operative Repsol, which has €5.7 billion debt outstanding, has not seen its yield curve invert.
Even though yields for Spanish corporates are already high – five year yields for Telefonica are just below 7% – with sluggish growth and a rising government debt-to-GDP ratio, there are plenty of headwinds for the Spanish bond market.
On the face of it, while corporate bond spreads are worryingly high, the same problem doesn’t seem to have infected loan books. The average interest rate on floating rate loans of more than €1 million (and up to one year initial fixed rate) is 2.97%. This isn’t a great deal higher than the euro-area average of 2.54%, and stands well below the Portuguese average of 5.55%, and the over-6% averages seen in Greece and Cyprus.
However, it’s a reflection of a lack of lending to less creditworthy borrowers and reduced demand for loans more generally, says Martin van Vliet, senior economist at ING.
“While the figures may show that the interest rates on new loans to corporates aren’t that high, what you don’t see are the corporates that aren't borrowing – whether because they can’t afford the costs or are less inclined to borrow and spend in the current climate, or because banks are selective in their lending due to risk and a low stock of equity capital.”
Economic cost
The higher cost of borrowing for Spanish corporates threatens to have a negative effect on an already-weak economy, as they will need to either pass the increased costs on to struggling consumers or reduce their spending. Van Vliet suspects that we will see the latter rather than the former.
“Higher cost of borrowing will mean that corporates are less inclined to borrow, and, thus, less inclined to invest. This will result in reduced GDP growth due to reduced spending,” says van Vliet.
The Spanish economy is contracting thanks to austerity measures demanded by eurozone creditors.
“The bigger concern for GDP growth is the austerity [programme]. We’re predicting a 1.6% shrink for the Spanish economy, of which 1% can be attributed to the austerity [programme],” says Holger Schmieding, chief economist at Berenberg.
With a weak economy, there is little incentive for corporates to invest due to the lack of confidence – unless the government can articulate a vision for growth in the years ahead, concludes the ING analyst.
"They [the government] need to show the private sector the light at the end of the tunnel."