Europe spread of sovereign debt crisis is making it harder for Spain

Europe spread of sovereign debt crisis is making it harder for Spain to pay the bills, and that is infecting corporate bonds beyond their borders.

Enel SpA, the Italian owner of the Spanish utility Endesa SA, was placed under review for possible downgrade last week by Moody's Investors Service, because the rising costs of the Spanish government of funding have been frozen plans to pay € 14600000000 ($ 19,200,000,000) due to their profits. Enel bonds were the worst performer this month among the 50 largest non-financial issuers of Bank of America the EMU Corporate Index.

"The spread between corporate and sovereign nation that is already happening," said Tom Sartain, a fund manager at London-based Schroders Plc, which oversees 245 billion U.S. dollars of assets. "The instability of the sovereign is seeping through."

Spain's plan to sell bonds backed by the government to reimburse utilities for regulatory subsidies derailed in November, when the premium bond yields to 10 years in Spain on German bonds rose to a euro was high. The government must sell € 192000000000 debt next year to maturity securities financing and close the gap, which complicates efforts to sell additional bonds to pay for utilities.

Prime Minister José Luis Rodríguez Zapatero, accumulated debt of the companies to promise more revenue than allowing them to charge customers. Under a system of state-controlled prices, Spanish consumers are poorly paid for electricity each year since 2005 because the rates are too low to cover all costs of public services, the creation of a "tariff deficit".

Credit Rating

The decision to suspend the sale of bonds of the tariff deficit, has weighed on other services in Spanish. Rating cut by Standard & Poor's Gas Natural SDG SA, one level to BBB on 17 December and warned it might lower the ratings of Iberdrola SA, the country's largest power company. Shares of Enel in Rome have fallen 5 percent this year, Natural Gas fell 22 percent and Iberdrola shed 9 percent, more than 7 percent decrease from the 31 members of the Stoxx 600 Utilities Index.

The bond yield rose Endesa this month, indicating more pressure on the debt of its parent company, said Neil Beddall, credit analyst at Barclays Capital in London. Demand from investors to keep premium of 5.375 percent bonds due Endesa in February 2013 instead of sovereign debt maturity similar peaked at five months of 157 basis points on Dec. 13 before falling to 156 December 20.

"Some of those who must be fed through Enel" Beddall said. "Ultimately, it is a certain correlation, which has to be."

Yield spread

The difference in yield between bonds of Enel SpA of 4.25 percent in June 2013 and public debt reached 128 basis points on December 20. That compares with a spread 94 basis points of German utility E. AG ON 5.125 percent notes in 2013.

Enel became the most indebted in Europe from the power company with the purchase of Endesa. The company took on 12 million euros in loans last year to raise its stake to over 92 percent. The administration has been selling assets and cutting costs to reduce liabilities.

"Enel has done its part to reduce debt, running the company well and remains true to its disposals program," said Massimiliano Romano, an analyst based in Milan Italy concentric. "They do well if not for the Spanish crisis."

CEO Fulvio Conti said in a Dec. 15 interview that the delay in reimbursement of Endesa will not endanger the Italian company's goal of cutting debt to 45 billion euros this year of 51 million euros in 2009 . The company faces no large maturities in 2011 so it can wait until financial markets stabilize, he said.

Budget Deficit

"More than three quarters of our debt is fixed, long term," said Conti. "We have serious maturity in 2011, therefore not affected by the financial turmoil. We are interested in having a stable financial market and tranquil. We are maintaining our credit rating."

Enel is paying the price that Spain seeks to control its budget deficit, which reached 11 percent of gross domestic product last year. Moody's threatened to downgrade the credit rating of Aa1 from Spain on 15 December, a day before the Treasury saw the cost of selling 10-year bond jumping more than 80 basis points at its monthly auction of 5.446 percent.

"The Spanish government has been unfortunate," said Helen Francis, a senior credit officer at Moody's in London. "Investors usually say these are good assets, but because the Spanish government has a lot of debt to refinance at this time, the concern is that it can take much more time instead of" bonds to reimburse utilities said.

Risk Premium

The extra yield investors demand to hold Spanish 10-year bonds over German bonds rose four basis points this week to 253 basis points at 9:50 am today in Madrid. That compares with a closing of the euro era high of 284 basis points on November 30.

Endesa is owed more than 7 million euros, or about half the tariff deficit, while Iberdrola is due to receive over 3.7 billion, Moody's has said.

The spread of Iberdrola bonds of 3.5 percent due in 2015 widened to 217 basis points on December 20, the highest level since April 2009.

Spain's plan to help Iberdrola and Enel bolster their balance sheets by selling up to 18 million euros of bonds backed by the government power goes against the objective minister, Elena Salgado, to reduce the emission limit investors additional interest being charged Spain to cover its budget deficit. Salgado is trying to cut out net financing needs of the country of 45 billion euros next year from the sale of stakes in National Lottery and the operator of state-owned airports.

Marketing aborted

Bankers at Goldman Sachs Group Inc., Banco Bilbao Vizcaya Argentaria SA and four other lenders who were hired to sell the bonds to the tariff deficit "of Spain had to abort their marketing effort in November as Ireland became the second country EU after Greece to find a rescue plan, fueling investor concern that Portugal and Spain was next.

A spokesman for the Spanish Economy Ministry who asked not be identified due to the policy of the ministry said the government will instruct the bank to proceed with the sale in the "appropriate time."

"The spreads are still high in historical terms, emphasizing the need for Spain to strengthen financial market confidence in the sustainability of public finances," said the Organization for Economic Cooperation and Development in a report of 20 December. "If the sovereign spreads remain high financing conditions in the private sector could be affected."