At the Generalitat de Catalunya’s press office, spokespeople for the economic and finance department are astounded by the number of calls from foreign journalists in the last week. “We never have this many,” says one official, who has been bombarded with questions over the regional government’s failure to secure a Eu1bn syndicated loan.
This type of international scrutiny is unlikely to die down while worries over Spanish bank, company and government borrowers’ access to funding persist.
In the case of Catalunya, there is no immediate need to panic. It is one of the regions with the biggest funding programmes, with about Eu7bn to raise this year, and it is about half way through it. But it also has some of the most sophisticated borrowing strategies among the autonomous regions. In May, Catalunya outsourced its structure note funding to Banesto and put in place a Eu9bn EMTN programme, which should in theory facilitate its access to the market. It also managed, at the end of March, to raise one of the biggest bond issues in a Eu11bn flurry of Spanish regional bond issues, an Eu850m five year 3.875% deal.
The Generalitat’s recent difficulties in securing a syndicated loan, which was being arranged by La Caixa, was put down by the regional government to “banks’ own liquidity problems”.
Catalunya spokesperson Adam Sedo insisted this week that the loan enquiry was merely an exercise in market sounding — to not do so would have been “irresponsible” of the Catalan government, he said. And he was at pains to stress that the region’s failure to secure a loan would not affect its ability to raise financing later in the year. Sedo acknowledged, however, that bond markets were “very shut right now”.
He also denied rumours that Catalunya had instead secured a bilateral loan from La Caixa, saying that the region was continuing market soundings. La Caixa declined to comment.
Catalunya has some time to get its funding on track before year end, and is unlikely to find bilateral funding completely cut off. It is also probable that syndicated lending is available, but at prices too unattractive for it to consider — after all, not so long ago Catalunya was able to secure loans for under 10bp.
But it is telling that of all the financing sources, bank lenders are proving reticent. Banks have rigorous internal processes to vet loans, including the all-important credit committee test.
It should be remembered that the loan market has not been the primary source of sovereign and regional funding for many years now — it was overtaken by the capital markets in the in the mid-1990s — so it may be natural that these lenders will not immediately come running back. It will, however, be worrying for these regional governments if these funding difficulties are repeated within the next six months and the bond markets do not re-open to them. If bond and loan markets are shut where do they go to refinance their maturing debts?
They may find some short term reprieve from rating agencies and analysts, which have been encouraged by the Spanish government’s austerity measures put together in the last month on a centralised and regional basis. Many have already raised worries about a revenue crisis in the regions, as income from tax and VAT continue to plummet.
But they are positive about the stringent steps taken to reduce regional deficits as early as 2011. For Catalunya, this means a Eu1.7bn reduction in the targeted deficit for this year, which will imply a cut in borrowing requirements — and a saving of about Eu90m in debt costs.
However, Standard & Poor’s has already warned that evidence of funding difficulties could lead to further downgrades —none of the regions it rates are triple-A any longer. Were this to happen, it would only exacerbate the regions’ financing troubles and push up funding costs way beyond the highs they have already hit as a consequence of their sovereign’s woes.
One dismissed syndicated loan does not make this a crisis. But Spain’s regions need to ensure they get the funding they require now — at whatever unpleasant margin levels — to avoid one.