By Kate Haywood and Bryan Keogh March 24 (Bloomberg) -- Europe’s banks are selling covered bonds at the fastest pace in four years in a sign investors are betting the continent’s economy is strong enough to weather the Greek budget crisis. Caja Ahorros Barcelona, Spain’s largest savings bank, and Westdeutsche Immobilienbank AG, a unit of Germany’s third- biggest state-owned lender, are among the mainly European financial companies that issued 87.5 billion euros ($118 billion) of the notes this year, according to data compiled by Bloomberg. That’s the most since 95.4 billion euros were sold in the same period of 2006. Sales of securities backed by mortgages and public-sector loans are rising before euro-region ministers meet to discuss how to help Greece, which has the biggest budget deficit in the region. A day after European Central Bank President Jean-Claude Trichet said recent data point to a “moderate recovery,” Germany and France agreed that the International Monetary Fund should be involved in any package for the Mediterranean nation, a German Finance Ministry official said. “This is about a healing in all markets” and banks “are benefiting,” said Daniel Shane, a banker in the debt capital markets group at Morgan Stanley in London. “People are more comfortable holding bank paper and the covered bond market is one of the recipients of that.” The extra yield investors demand to own euro-denominated covered bonds relative to government debt is the lowest in almost two months at 89 basis points, or 0.89 percentage point, from a high for the year of 100 basis points on Feb. 8, Bank of America Merrill Lynch index data show. The spread narrowed with the euro-region economy poised to grow 1.2 percent this year, after falling 4.1 percent in 2009, according to the median forecast of 16 economists surveyed by Bloomberg. HSBC, Deutsche Bank Elsewhere in credit markets, HSBC Holdings Plc, Deutsche Bank AG and Wells Fargo & Co. tapped debt markets yesterday to sell unsecured bonds, according to data compiled by Bloomberg. Philip Morris International Inc. sold $1 billion of 10-year notes in its first dollar-denominated bond sale since November 2008. The 4.5 percent notes pay a spread of 98 basis points more than similar-maturity Treasuries, Bloomberg data show. In a sale of $2.5 billion of 10-year debt in May 2008, New York-based Philip Morris paid a spread of 177 basis points. Lyondell Chemical Co. boosted a bond sale by $500 million while cutting a loan by the same amount as it prepares to emerge from bankruptcy, according to people familiar with the matter. The Houston-based company is marketing $2.75 billion of notes in euros and dollars, said one of the people, who declined to be named. The dollar-denominated portion may yield an interest rate of as much as 8.25 percent while the euro-denominated bonds may pay as much as 8.375 percent, they said. Poised for Upgrade The number of borrowers poised for upgrades to their credit ratings increased by 17 this month to 218, Standard & Poor’s said yesterday. European leveraged loan defaults declined to a nine-month low in February, S&P said in a separate report. The rate of non-payment for issuers in the ratings company’s European Leveraged Loan Index fell to 7.7 percent from 8.2 percent in January. Defaults peaked at 10.5 percent at the end of 2009. Enel SpA, Italy’s biggest utility, plans to raise 8 billion euros from five-year loans to refinance credit lines, according to people familiar with the matter. Proceeds from the revolving credit would replace a 5 billion-euro facility due in November, the people said. Chief Executive Officer Fulvio Conti is seeking to lower obligations after the power company borrowed 12 billion euros in February 2009 to raise its stake in Spain’s Endesa SA, becoming Europe’s most indebted utility. Glencore Loan Glencore International AG, the world’s largest commodities trader, plans to raise at least $7 billion from loans to refinance credit lines at lower cost, three people familiar with the matter said. The Baar, Switzerland-based company will use the proceeds to renew debt including a $6.65 billion forward- start loan signed last year, said the people, who declined to be identified because the information is private. European corporate credit risk was little changed, with the Markit iTraxx Europe Index Series 13, linked to swaps on 125 investment-grade companies, declining 1 basis point to 78.75 as of 11:28 a.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Australia Series 13 index fell 4 basis points to 81.5 in Sydney, Citigroup Inc. prices show. It’s heading for its lowest level since March 17, according to CMA DataVision. U.S. corporate credit risk fell yesterday. The Markit CDX North America Investment Grade Index Series 14 dropped 3.5 basis points to a mid-price of 86.1 basis points, according to Markit Group Ltd. Greece Summit Swaps on Greece were unchanged today at 322.5, CMA prices show. Germany and France agreed to back International Monetary Fund aid for the most indebted European nation, a German Finance Ministry official said yesterday, signaling an agreement may be near on resolving a budget crisis that threatened to spill over to other countries in Europe. Conflicting signals before a European Union summit, due to start in Brussels tomorrow, pushed swaps on Greece to as high as 343 basis points on March 22, CMA prices show. Credit-default swaps tied to Portugal’s debt rose 6 basis points to 140, according to CMA, after the country had its credit rating lowered one step to AA- by Fitch Ratings, which cited its deteriorating public finances. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. An increase indicates deterioration in the perception of credit quality; a decline, the opposite. Negative Swap Spread The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities. The gap between the rate to exchange floating- for fixed-interest payments and comparable maturity Treasury yields for 10 years narrowed to as low as negative 2.5 basis points, the lowest since at least 1988, when Bloomberg began collecting the data. Covered bond spreads have tightened at a slower pace than those on other senior corporate debt. Typically carrying top ratings, they also widened less at the onset of the deepest financial crisis since the Great Depression. The extra yield on the mortgage- and public sector-backed securities is still more than double the 36 basis-point average for the past 12 years, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Investment-grade corporate bond spreads narrowed to 148 basis points as of March 23, compared with an average 92 basis points since 1997, index data show. Credit Market Seizure Covered bond sales fell as the credit market seized up, when investors shunned hard-to-value securities such as those backed by real estate. Issuance tumbled to 228.4 billion euros in 2008 from a record-high 347.8 billion euros in 2007, according to data compiled by Bloomberg. The tightening of spreads and pick-up in issuance since then are “reaffirming confidence in the covered bond asset class and that covered bonds are vital to the economic recovery in the eurozone,” said Ted Lord, head of covered bonds at Barclays Capital in Frankfurt. “Recovery can only really happen if you have well-functioning refinancing mechanisms for mortgages and public-sector infrastructure,” he said. Europe’s economy is improving after emerging from the worst slump in more than six decades in the third quarter of 2009, according to the EU’s statistics office in Luxembourg. The default rate on speculative-grade bonds in Europe will drop to 1.7 percent by December from 9.7 percent last month, according to Moody’s Investors Service. New York-based Moody’s expects the rate to climb to 2 percent by February 2011. New Economic Reports The region’s services and manufacturing industries grew at the fastest pace since 2007 and German business confidence jumped as the European economy rebounded from a fourth-quarter relapse, according to separate reports today. “Confidence has improved and people are happier to buy bank debt and take exposure to the real estate sector,” said Frank Will, a covered bond analyst at Royal Bank of Scotland Group Plc in London. Banco Bilbao Vizcaya Argentaria SA, Spain’s second-largest bank by assets, plans to sell covered bonds due October 2013 backed by public sector loans, a banker with knowledge of the deal said. The notes will be priced to yield 57 basis points more than midswaps, the banker said. Banco Santander Totta, the Portuguese unit of Spain’s biggest bank, plans to sell three-year covered bonds in euros, a banker familiar with the matter said. La Caixa Caja Ahorros Barcelona, also known as La Caixa, raised 1 billion euros from a sale of six-year covered bonds on March 22, Bloomberg data show. The notes were priced to yield 90 basis points more than the benchmark mid-swap rate. Westdeutsche Immobilienbank, a unit of WestLB, sold 500 million euros of the bonds at a spread of 18 basis points over swaps March 22. Banco Popular Espanol SA, Spain’s third-biggest lender, sold 1 billion euros of eight-year covered bonds yesterday, according to Bloomberg data. Swedish Covered Bond Corp., a subsidiary of Stockholm-based mortgage lender SBAB that was incorporated to issue the securities, raised 1 billion euros today from a sale of seven-year notes. Deutsche Postbank AG, the German retail lender, plans to sell 1 billion euros of 10-year covered bonds this week that may be yield in the low-20s basis points over swaps, according to a banker with knowledge of the matter. To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.net; Bryan Keogh in London at bkeogh4@bloomberg.net

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