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Spain electricity review may delay bond issue plan

Source: Reuters - Sat 26th Jun 2010

Spain's decision to suspend a planned electricity tariff increase could delay its plans to sell billions of euros of bonds backed by energy payments the government owes utilities, analysts said.

Spain on Thursday scrapped a planned tariff hike that would have added about 4 percent to consumers' electricity bills as it was concerned an increase could harm economic recovery.

The uncertainty over a review of Spain's energy sector will mean utility companies may have to wait longer to get the proceeds from a bond issue.

The review has also added to concerns investors might be unwilling to buy this debt - known as tariff deficits - due to heightened sovereign risk.

A tariff deficit is the shortfall between what customers pay for electricity and the cost of generating it as determined by energy regulator CNE. It appears on the utilities' books as government-backed debt.

"We are concerned that the securitisation of the tariff deficit is unlikely to proceed until the review has been completed" Barclays Capital credit analyst Neil Beddall said in a note to investors.

"It could also be deferred or even cancelled in our opinion" he said.

Barclays said that although all Spanish utilities would be affected, Iberdrola was more susceptible to the impact of the delay.

"We are downgrading our recommendation on Iberdrola to market weight from overweight" the analyst said.

The Spanish government mandated six banks - BBVA, BNP Paribas, Credit Agricole, Deutsche Bank, Goldman Sachs and Santander - earlier this week to lead manage the bond issue, an official at one of the banks said.

"There has been a meeting between the issuer and banks but at this stage nothing has been decided in terms of format or size" the official said.

Analysts at CreditSights were sceptical about the timing of a tariff bond issue, saying it could be delayed at least until the end of the government's review on the tariff.

Spanish utility companies had said the first tranche would take place before the summer. "This is unsettling and clearly negative" CreditSights said.

CreditSights said if the review drags on without result then it could become a worry but was hopeful that at the end of the process the energy tariff would fully reflect utilities' costs.

The Spanish government laid out a plan in April 2009 whereby utilities, including Endesa, Iberdrola and Gas Natural, could use its guarantee to sell their debt, or tariff deficits, in a government-backed securitisation fund.

Utilities used to repackage these deficits and sell the receivables on to institutions, but that came to an end in 2008 at the height of the financial crisis.

The size of the tariff deficit securitisation fund is potentially about 20 billion euros ($26.83 billion), split into 10 billion euros for the 2001-2008 period, and an additional 9.5 billion euros for 2009-12.

The most exposed utility is Endesa, both in terms of earnings before interest, tax, depreciation and amortisation and the magnitude of its tariff deficit, CreditSights said.

"However, Endesa is also in a very strong liquidity position and has some of the best credit metrics for its rating" CreditSights added.

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