Cut off from regular loan financing after a spectacular banking collapse, Spain's mid-sized companies are being forced into the costly junk bond market to meet their funding needs. The good news? Borrowing costs have slumped, investors are proving willing to snap up relatively high-risk debt and companies are gaining access to funds they need for investments which could ultimately help drive Spain's economic recovery.
The move to capital market financing, away from traditional cosy relationships with lenders, increases the cost of capital but gives companies better conditions and distances them from a shrivelling Spanish banking sector. "The amount of companies inquiring about high-yield issues is spectacular, it's a continuous flow," said one senior Madrid-based banker at an international bank. "They realise it's better to get away from banks before they have you up against a wall."
One of the pioneers in taking to capital markets rather than banks is unlisted cable operator Ono, which started a high-yield bond programme to refinance its bank debt in 2010. Ono had 3.5 billion euros of debt from various Spanish banks and cajas. In the last two years it has issued five bonds in Europe and the United States, raising more than 2.5 billion euros and cutting its bank reliance by three quarters.
Ono's average cost of capital is around 8.5 percent, more expensive than bank loans, but the advantages of bonds is that they come with fewer conditions on the borrower, have longer maturity periods and result in a financing pool consisting of thousands of investors rather than three or four banks, Mateu said. Plenty more are following Ono's route.