Bloomberg News

Telefonica Selling Bonds as Spreads Tighten to Lowest Since 2008

January 08, 2013

Telefonica SA bonds fell in Europe as Spain’s largest phone company offered 1.5 billion euros ($2 billion) of 10-year securities.

The company’s 4.71 percent notes due 2020 fell 0.4 percent to 108.57 cents on the euro, one of the worst performers in Bank of America Merrill Lynch’s Euro Non-Financial Corporate Index. That sent the yield premium to benchmark government debt up six basis points to 235, data compiled by Bloomberg show.

The Madrid-based company is taking advantage of a rally in credit markets that has pushed relative yields on corporate bonds to the lowest since January 2008. The spread over sovereign debt has fallen to 136 basis points, according to Bank of America Merrill Lynch’s Euro Corporate index, compared with 301 basis points at the start of 2012.

“The issuer is plugging into the favorable environment and locking in longer-term funding while the iron is hot, and it will probably stay hot,” said Suki Mann, a strategist at Societe Generale SA in London. “There’s not enough supply and huge demand.”

Investors are hungry for securities from companies in Europe’s weakest nations as they seek higher returns from riskier assets. The relative spread of euro periphery non- financial companies is at its lowest since July 2011, according to Bank of America Merrill Lynch’s Euro Periphery Non-Financial Index.

Credit-Default Swaps

The cost of insuring against default on Telefonica debt has tumbled to an 18-month low, with credit-default swaps dropping to 208 basis points from a record 572.5 in June.

The new bonds are being marketed with a spread of 230 basis points more than the benchmark mid-swap rate, according to bankers involved in the deal.

It’s only the third 10-year offering from a peripheral issuer since the beginning of last year, and only the fifth since the start of 2011, according SocGen’s Mann.

In credit derivatives markets, the cost of insuring European corporate debt fell. The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high- yield credit ratings declined 5.5 basis points to 424 basis points.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 1.5 to 101 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell 3.5 basis points to 119 and the subordinated index declined seven to 196.

A basis point on a credit-default swap protecting 10 million euros ($13.1 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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