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It’s the regions’ time to shine

A €1.4bn five year bond for the Autonomous Community of Madrid on Tuesday — its largest ever — shows that the new year rally in peripheral eurozone debt has extended from sovereign to regional issuers. With spreads over sovereigns reaching pre-crisis levels, it is time for other regional names to pull off some eye catching deals.

A year is a long time in Spanish regions’ market access. Just 12 months ago, Madrid paid around 190bp over the Spanish sovereign to sell €1bn of five year debt. That, coupled with a similarly expensive privately placed €1bn tap of its July 2026 bonds, was suspected of convincing the Spanish government to limit the regions to spreads of 100bp over Bonos.

It marked the end of many regions’ independent market access that year.

In 2014, things could not be more different. With Madrid pricing at 49bp over Bonos — after starting the day with initial price thoughts of high 50s — there is plenty of room for smaller issuers to come in and show their clout.

Indeed, rumours are circulating that a smaller region was ready to pull the trigger before Madrid called shotgun.

Madrid’s deal — along with a strong auction for Italy on Tuesday — also shows that any spill over into eurozone periphery debt over the past two trading days from the sell-off in emerging markets was probably jittery investors heading for the exit, rather than a marked sell-off.

That should boost Spanish regions’ confidence to not just show off their regained plumage in the public markets. There could also be opportunities for them to extend their average maturities through private placements — this time at a much lower price than Madrid’s questionable deal last year.

French regional issuers have already shown the way. The credits have extended the average tenors of their private medium term notes from around nine years in 2010 to 14 years in 2013. Region of Provence-Alpes-Côte d'Azur broke the record for the longest deal from one of the issuers with a 33 year note last week.

Those issuers have been able to print at such long tenors because of the tightening in their spreads over OATs over the past few years. Two years ago, Provence-Alpes-Côte d'Azur printed at a spread of 75bps over OATs. That spread is now around 20bp-25bp.

That trend is replicating itself with Spanish spreads. With MTN investors always keen to make a bit of a pick-up over sovereign debt there could be a wealth of opportunities awaiting Spanish regions.

For those funding officials willing to think creatively, they may have never had it so good.

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