For bankers looking for new growth in Spain's domestic bond
market, two areas stand out above all others: securitisation and
project financing. Both meet the rising demand among investors for
novel credit plays. And both meet the mounting pressure on public
and private sector entities for cost-effective funding and optimal
use of capital.
So far the asset-backed sector has been slow to take off, held back
by an unfriendly regulatory environment and the reluctance of many
Spanish banks to shed assets at a time when growth has been the
But financiers still hold high hopes for securitisation, as banks
look to make better use of their capital and as recently passed
regulation makes it possible - and increasingly attractive - for
other originators to securitise a more varied range of financial
and corporate assets.
Also poised for take-off is the project bond market, where the
financing of infrastructure projects through debt securities could
provide new opportunities for underwriters, monoline insurers and
When, last September, Société Générale and Bankinter launched
the first tranche of an asset-backed deal for four universities in
the region of Valencia, it was seen as prising open a new realm of
opportunities for the Spanish capital market.
Aside from being the first ever Spanish capital market financing for a university project, the two tranche Pta75.6bn package was also the first to be guaranteed by the monoline insurance company, MBIA-AMBAC.
The transaction also provided a turning point. It was the longest dated Spanish peseta bond ever issued at the time, with one of the tranches on the Pta46.8bn deal offering a 25 year maturity. The other tranches were for maturities of 15 and 20 years, with the balance accounted for by a Pta28.8bn EIB term loan.
MBIA-AMBAC said at the time of the issue that its involvement "made this transaction possible as the universities could not have accessed the capital markets without credit enhancement.
"In addition, the guarantee from MBIA provided a match between the needs of the issuers for long term financing and those of the investors looking for long term, high quality investment opportunities.
"MBIA-AMBAC was the 'bridge' between these complementary financial needs. Finally, MBIA-AMBAC agreed to guarantee the EIB loan, further lowering financing costs."
The universities' bond issue - launched to upgrade the existing facilities at four universities in the Valencia region - is backed by future revenues, making it the first of its kind in the Spanish market.
But Manuel Chevalier, director general at MBIA-AMBAC's Madrid office, suggests that the main appeal of the bonds was their maturity. "I made a series of presentations to about 100 investors before the issue was launched," he says. "About 90% of them expressed a preference for assets with terms of 20 and 25 years."
The strength of demand for longer term assets in Spain is amply illustrated by the fact that there has been virtually no secondary market trading of the Valencia university bonds. With long term assets scarce, the last thing investors want to do, say local bankers, is to relinquish elusive 20 or 25 year bonds.
Growing levels of demand for long dated assets, Chevalier adds, bodes well for the growth of a capital market for project bonds in Spain in general, and for the first shadow toll road scheme - due to be launched in June - in particular.
This is the Pta40bn M45 Madrid Ring Road Project, which will be modelled along similar lines to the Road Management Consolidated project launched in March 1996 in the UK, which was financed via a package of bonds and loans.
"It's interesting to see that both the advisers to the region of Madrid and those responsible for the infrastructure project have specifically indicated that they want a portion of the debt to be financed through bonds guaranteed by a monoline insurer," says Chevalier.
"This is because the wish is to finance local infrastructure projects with bonds placed with the people who are going to use the facilities."
Giving the bonds a triple-A wrap will broaden their local appeal to an investor base which remains fundamentally conservative, although there is no reason why the paper should not also be placed elsewhere.
To date, with the exception of Spain's well documented nuclear moratorium deal, a small water treatment plant in Vigo and an equally small waste to energy project in Barcelona, securitisation deals in Spain have been exclusively restricted to those backed by mortgages.
There seem to have been two principle reasons for this in the past, although there is now evidence that the barriers are lifting.
First, Spanish law imposes a withholding tax on interest paid on any securitised bond backed by receivables other than mortgages. Second, the lifeblood of securitisation transactions in other markets - the financial sector - is uninterested, for the time being at least, in securitising many of its assets.
"For Spanish banks," says a Madrid banker, "size has traditionally been the number one priority. You can still see evidence of that today, with Spanish banks buying banks in Latin America almost on a weekly basis. They're still hungry for new assets and the last thing they want to do is get rid of existing ones."
But the passing by the Spanish government on May 14 of a long-awaited decree covering a wide variety of securitisation has given local bankers hope that the considerable potential in Spain's securitisation market may soon be unleashed.
The reform, which brings Spain into line with standard practice in the US and UK, widens substantially the range of banking assets that can be securitised.
Rather than simply covering mortgages, securitisation can now be applied to all bank assets - raising hopes that bond issues backed by commercial loans, car loans, credit card receivables and other assets will soon emerge.
Already Banco Santander is working on the first securitisation of corporate loans. The bank is settling up a Pta 200bn vehicle which will issue domestic commercial paper backed by short-term corporate loans.
Other banks, notably BBV, look sure to follow and investment bankers are optimistic that the new law will give a huge fillip to Spain's securitisation market, paving the way for deals not just from the banking sector but from the corporate world as well.
Many potential originators have already been waiting for a long time for the new law to be passed. Some two and a half years have elapsed since work started on the new law; even in early May, there was little expectation of any imminent progress.
Although the government has passed the law, there is still work to be done. Any fiscal change - in terms of amending the withholding tax status of asset-backed bonds - will require the finance ministry's approval, while the stockmarket regulator CNMV will also have to approve transactions on a case-by-case basis.
But bankers are hopeful that the creation of a more active and more varied securitisation sector will be welcomed by investors, whose search for yield pick-up at a time of low rates has led to a flow of funds into equities and other higher-yielding products at the expense of the plain vanilla bond market.
And there is little doubt that the pent-up demand for securitisation among would-be issuers and investors is such that Spain could quickly develop into one of Europe's more vibrant asset-backed markets.
Chevalier says that outside of the banking sector, MBIA-AMBAC has been approached by all kinds of parties, such as hotel chains, which are interested in securitising their receivables. "These represent very large amounts of money," he says, "but for these deals to come to the market, we need a change in the law."
That change has now come. But, even so, it is likely that the asset-backed market in Spain will remain dominated by mortgage-backed issues for the time being, as other issuers become acquainted with the requirements necessary for issuing securitised bonds.
According to Javier Pazos, director in the debt management department at Banco Santander, his bank has accounted for issues worth the equivalent of $1.5bn over the last seven to eight years - around 75% of the total volume over that period in Spain's fledgling securitisation market.
Pazos identifies two reasons to explain why securitisation has yet to flourish in Spain or to become widely applied, even in the mortgage-backed sector where originators have no legal impediment to issuing.
"The first reason is that banks in Spain, both commercial and savings and loans, have had extremely strong capital bases, with BIS ratios averaging around 12%," he says. "Second, credit demand in Spain over the last five years has been weak."
Banco Santander, which according to Pazos pioneered the concept of Spanish securitisation in 1991, is no exception to this rule. "We've been doing one or two issues a year since the start of the 1990s," he says, "but not because we wanted to get rid of assets on our balance sheet.
"We basically wanted to develop the technique of securitisation, to get our IT systems in place, which we have, and to improve our expertise in structuring securitisation issues."
It is likely that the bank, and most its major rivals, will approach the new securitisation law in much the same way - as a way of gaining expertise in the technology, rather than as a way of shedding assets.
Opportunities for foreign banks and investors in the Spanish mortgage-backed market have been fairly limited, although Morgan Stanley, which reckons to be the largest international distributor of Spanish securitisation deals, has enjoyed good business in the sector.
Morgan Stanley led the international tranches of Santander's Hipotebansa issue numbers four, five and seven, the latest of which was the largest to date, raising some Pta52bn.
A banker at Morgan Stanley's securitisation desk in London says that the international tranche would typically represent about 80% of any given mortgage-backed deal in Spain. He adds that "the collateral backing Spanish mortgage securitisation issues is among the most attractive in Europe".
He adds: "Mortgage portfolios in Spain are very well diversified, 50% risk weighted and backed by very low loan to value ratios of between 55% and 60%. That is unheard of in markets such as the US or the UK."
Santander (as an issuer) and Morgan Stanley (as an international distributor) have not enjoyed a monopoly over the Spanish mortgage-backed securitisation market.
In July 1997, for example, JP Morgan broke new ground by leading a Pta20bn FRN for the Valencia-based savings bank, Bancaja, through a special purpose vehicle (SPV) Fondo do Titulización Hipotecaria Bancaja I.
These 20 year notes, paying between 16bp and 45bp over Libor, were backed by residential mortgages and attracted a wide range of continental European investors which were buying Spanish mortgage-backed securities for the first time.
Whether the strength of appetite from foreign investors for this sort of structure will lead to an explosion in the Spanish securitisation sector is still open to question. "I don't expect a deterioration in the capital bases of Spanish banks, or to see BIS ratios fall below 12%," says Pazos at Banco Santander.
"But for sure pressure will grow for the Spanish banks to make better use of their capital. Combined with the new legislation I don't expect the Spanish securitisation market to explode. But I do think the technique will become increasingly usual both for Spanish banks and other originators." EW