FT Alphaville " Concessional in Spain Lend at low rates, for a long term. It's one way Spain's official creditors could believably renounce seniority in the bailout. Concessional loans would make it easier for Spain to refinance its debt stock as a whole, improving bondholder recovery, while recapitalising its banks. Arguably. Monday's Eurogroup meeting told us that the maximum maturity of European Financial Stability Facility loans to Spain will be 15 years, with an average maturity of some 12.5 years. Long enough? Now an EFSF FAQ on Spain tells us that the loan interest rate will be the yield of bonds issued by the EFSF plus a "small" fee for operational costs. There is no mention of Spain having to pay a margin, as notably Ireland and Portugal had to on taking EFSF bailouts. Low enough? Maybe - the EFSF tapped a 25-year bond at 3.47 per cent recently. But one oddity here is that EFSF loans to Spain technically don't need to be subjected to market rates. Spanish bank recaps could be a largely cash-less operation. Unless we're mistaken, the current plan is to issue EFSF bonds to Spain's bank recap fund, Frob, which will pass the bonds to banks in return for equity. Banks could hold the EFSF bonds on their balance sheets and pledge them to the European Central Bank as collateral for liquidity. Frob could also need actual cash, for example to subscribe to contingent capital issued by banks which aren't deemed to need immediate recapitalisation. But overall it seems very like the Greek bank recap. Currently the draft Spain MoU provides for "disbursements... made either in cash or in the form of standard EFSF notes." So, from the FAQ - compare: I12 - How will the funds be raised? EFSF and ESM once ratified stand ready to provide financial assistance to Spain. The funds may be raised through cash, bills or bonds. However, in a similar manner to the recapitalisation of the Greek banking sector supplied by EFSF in April, it is expected that EFSF/ESM mostly provide bonds, without raising the full extent of the funds in the market. And contrast: I18 - What would be the financing cost for Spain? EFSF's financing cost for Spain would be the market rate of bonds issued plus a small operational service fee. The cost would therefore be determined by the maturity of the bonds issued and market conditions. And ponder. Related links: Full FAQ, updated 12 July - EFSF Seniority in Spain - *good news* for bondholders? - FT Alphaville This entry was posted by Joseph Cotterill on Friday, July 13th, 2012 at 8:45 and is filed under Capital markets. Tagged with bank recapitalisation, EFSF, ESM, seniority, Sovereign debt, Spain, spanish banks.