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Spain Power Debt Infects Enel With Sovereign Woes: Euro Credit
2010-12-22 09:03:57.81 GMT
By Alessandra Migliaccio and Ben Sills
Dec. 22 (Bloomberg) -- Europe's spreading sovereign debt
crisis is making it tougher for Spain to pay electricity bills,
and that's infecting corporate bonds beyond its borders.
Enel SpA, the Italian owner of Spanish power company Endesa
SA, was put under review for a possible downgrade last week by
Moody's Investors Service because the Spanish government's
surging financing costs led it to freeze plans to repay 14.6
billion euros ($19.2 billion) owed to its utilities. Enel bonds
were the worst performers this month among the 50 biggest non-
financial issuers in Bank of America's EMU Corporate Index.
"The contagion between corporate and sovereign is already
happening," said Tom Sartain, a fund manager at London-based
Schroders Plc, who oversees $245 billion of assets. "The
instability of the sovereign is filtering through."
Spain's plan to sell government-guaranteed bonds to
reimburse power companies for regulatory subsidies was derailed
in November when the yield premium on Spain's 10-year debt over
German bunds surged to a euro-era high. The government must sell
192 billion euros of debt next year to finance maturing
securities and cover the deficit, complicating efforts to market
the additional bonds to repay the power companies.
Prime Minister Jose Luis Rodriguez Zapatero racked up the
debt by promising power companies more revenue than he allowed
them to charge customers. Under a system of state-controlled
prices, Spanish consumers have underpaid for electricity each
year since 2005 because rates are too low to cover all the
utilities' costs, creating a "tariff deficit."
Credit Rating
The decision to suspend selling tariff-deficit bonds has
weighed on other Spanish utilities. Standard & Poor's cut Gas
Natural SDG SA's rating one level to BBB on Dec. 17 and warned
it may lower the rating on Iberdrola SA, the country's largest
power company. Shares of Rome-based Enel have dropped 5 percent
this year, Gas Natural declined 22 percent and Iberdrola shed 9
percent, more than the 7 percent decline of the 31-member STOXX
600 Utilities Index.
The yield on the bonds of Endesa rose this month, signaling
further pressure on the debt of its parent company, said Neil
Beddall, credit analyst at Barclays Capital in London. The
premium investors demand to hold Endesa's 5.375 percent bonds
maturing in February 2013 rather than similar maturity sovereign
debt reached a five-month high of 157 basis points on Dec. 13,
before slipping to 156 on Dec. 20, according to generic prices
compiled by Bloomberg.
"Some of it should feed through to Enel," Beddall said.
"Ultimately, they are loosely correlated, they have to be."
Yield Spread
The difference in yield between Enel SpA's 4.25 percent
bonds due in June 2013 and government debt reached 128 basis
points on Dec. 20. That compares with a 94 basis-point spread
for German power company E.ON AG's 5.125 percent notes due in
2013.
Enel became Europe's most-indebted power company with its
purchase of Endesa. The company took on 12 billion euros in
borrowing last year to raise its stake to more than 92 percent.
Management has been selling assets and cutting costs to reduce
liabilities.
"Enel has done its part by reducing debt, running the
company well and sticking to its disposals program," said
Massimiliano Romano, an analyst at Milan-based Concentric Italy.
"They would be doing ok if it weren't for the Spanish crisis."
Chief Executive Officer Fulvio Conti said in a Dec. 15
interview that the delay in reimbursing Endesa won't jeopardize
the Italian company's goal of trimming debt to 45 billion euros
this year from 51 billion euros in 2009. The company doesn't
face big maturities in 2011 so it can wait for financial markets
to stabilize, he said.
Budget Deficit
"More than three quarters of our debt is fixed, long
term," Conti said. "We have no serious maturities in 2011, so
we aren't impacted by the financial turmoil. We are interested
in having a stable and possibly calm financial market. We are
still maintaining our credit rating."
Enel is paying the price as Spain struggles to rein in its
budget deficit, which equaled 11 percent of gross domestic
product last year. Moody's threatened to cut Spain's Aa1 credit
rating on Dec. 15, a day before the Treasury saw the cost of
selling 10-year bonds jump more than 80 basis points at its
monthly auction to 5.446 percent.
"The Spanish government has been unfortunate," said Helen
Francis, a senior credit officer at Moody's in London.
"Investors would normally 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 may take a lot longer to
place" the bonds to reimburse the utilities, she said.
Risk Premium
The extra yield investors demand to hold Spanish 10-year
bonds over German bunds rose four basis points this week to 253
basis points at 9:50 a.m. today in Madrid. That compares with a
euro-era closing high of 284 basis points on Nov. 30.
Endesa is owed more than 7 billion euros, or about half of
the tariff deficit, while Iberdrola is due to receive more than
3.7 billion euros, Moody's has said.
The spread on Iberdrola's 3.5 percent bonds due in 2015
widened to 217 basis points on Dec. 20, the highest level since
April 2009, according to Bloomberg prices.
Spain's plan to help Iberdrola and Enel shore up their
balance sheets by selling as much as 18 billion euros of
government-backed power bonds runs counter to Finance Minister
Elena Salgado's aim of reducing issuance to limit the extra
interest investors are charging Spain to cover its budget
deficit. Salgado is trying to trim the country's net financing
needs of 45 billion euros next year by selling stakes in the
national lottery and the state-owned airports operator.
Marketing Aborted
Bankers at Goldman Sachs Group Inc., Banco Bilbao Vizcaya
Argentaria SA and four other lenders who were hired to sell the
tariff-deficit bonds for Spain had to abort their marketing
effort in November as Ireland became the second EU country after
Greece to seek a bailout, fueling investor concern that Portugal
and Spain would be next.
A spokesman for the Spanish economy ministry who declined
to be identified because of ministry policy said the government
will instruct the banks to proceed with the sale at the
"appropriate moment."
"Spreads remain high by historical standards, emphasizing
the need for Spain to strengthen financial market confidence in
the sustainability of government finances," the Organization
for Economic Cooperation and Development said in a Dec. 20
report. "If the high sovereign spreads persist, funding
conditions in the private sector could be affected."
For Related News and Information:
Top Italy stories: TOP IT<GO>
Top energy: ETOP <GO>
More credit market wraps: NI CMW <GO>
Top bond stories: TOP BON <GO>
Top credit news: TOP CM <GO>
Corporate bond new issue monitor: NIM <GO>
--With assistance from Esteban Duarte in Madrid, Bryan Keogh and
John Glover in London. Editors: Andrew Davis, Todd White
To contact the reporters on this story:
Alessandra Migliaccio in Rome at +39-06-4520-6320 or
amigliaccio@bloomberg.net;
Ben Sills in Madrid at +34-91-700-9603 or bsills@bloomberg.net
To contact the editor responsible for this story:
Will Kennedy at +44-20-7073-3603 or
wkennedy@bloomberg.net;
Reed Landberg at +44-20-7330-7862 or landberg@bloomberg.net
