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Spain's CAM Faces Record Cost to Sell Covered Bonds

Caja de Ahorros del Mediterraneo, the Spanish savings bank known as CAM, faces the highest interest costs as it borrows 1 billion euros ($1.5 billion) in the market for European mortgage debt known as covered bonds.

CAM, based in Alicante, Spain, will pay 80 basis points over the benchmark mid-swap rate to sell the debt, said a banker involved in deal who declined to be identified. That's more than the previous record 73 basis-point spread on Spanish cedulas sold by Banco Pastor SA this week, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

``This is the highest spread ever paid for a European covered bond,'' said Jose Sarafana, head of covered bond strategy at Societe Generale SA in Paris. ``It's bargain-basement time in the covered bond market.''

Spanish banks are being penalized by bondholders as the number of homeowners late on loan payments rises to 1.13 percent of debt included in mortgage-backed securities rated by Moody's Investors Service, the highest in more than six years. Public sales of Spanish covered bonds declined by 70 percent to 8 billion euros so far this year, compared with the same period in 2007, Deutsche Bank AG data shows.

``Spanish institutions are facing quite a dramatic increase in funding costs,'' said Ivan Comerma, head of fixed-income at Caixa Catalunya in Barcelona, which oversees 3 billion euros of securities.

Barclays Capital, Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc's ABN Amro unit are managing the deal with CAM. The issue will be benchmark in size, said the banker involved in the transaction. Investors typically consider benchmark sales to be at least 500 million euros.

Covered bonds are secured by loans to public sector institutions or mortgages. They differ from conventional asset- backed securities in that the collateral backing the debt remains with the issuer, which becomes liable for the notes if the assets aren't sufficient.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLtrXmMRlF38
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