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Cajamar May Pay Record Yield Premium on Covered Bonds

Source: Bloomberg - Tue 2th Nov 2010

Spain's largest 'Caja', or rural savings bank, Cajamar Caja Rural SC, is selling covered bonds at a record yield premium for the guaranteed notes.

Cajamar is offering 285 basis points to 295 basis points more than the benchmark swap rate to sell more of its 3.5 percent covered bonds due 2014, said two people with knowledge of the transaction. That compares with 260 basis points that rival Bancaja offered last month on covered bonds due 2013, according to data compiled by Bloomberg.

Spreads on four-year Spanish covered bonds have widened from as low as 45 basis points in January amid investor concerns about losses from banks' sovereign debt holdings. The yield on 10-year Spanish government bonds over German debt widened today to 182 basis points, the biggest gap in a month, on concern over the ability of the region's peripheral nations to cut deficits.

"It's a surprise that a Spanish rural savings bank dares to go to the market," said Thomas Nyegaard, a covered bonds and securitization analyst at F&C Asset Management Plc in London. "It will be a real test of the limits of the demand of Spanish paper as it's a small lender coming at a time when spreads of debt from peripheral countries are again approaching records."

Since July, Spanish lenders have raised at least 10.8 billion euros from sales of covered bonds, a type of debt backed by mortgages or public sector loans and guaranteed by the issuer.

Spanish banks are returning to capital markets as they seek to reduce their reliance on central bank loans. Lenders in the country cut their funding from the European Central Bank to 97.6 billion euros in September from 109.7 billion euros in the previous month and as high as 130 billion euros in July, Bank of Spain data show.

Banco Bilbao Vizcaya Argentaria SA, Goldman Sachs Group Inc., JPMorgan Chase & Co., Landesbank Baden-Wuerttemberg and UBS AG are managing the sale for Almeria-based Cajamar, said the people, who declined to be identified before the deal is completed.

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