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Dec. 22 (Bloomberg) – Europe’s spreading sovereign debt crisis is making it tougher for Spain to pay electricity bills, and that’s infecting corporate bonds beyond its borders.

Enel SpA, the Italian owner of Spanish company Endesa SA power was put under review for a possible downgrade last week by Moody’s Investors Service because the Spanish government’s surging financing costs led it to freeze plans to repay 14.6 billion euros ($19.2 billion) owed to its utilities. “Enel bonds were the worst performers this month among the 50 biggest non – financial issuers in Bank of America’s EMU Corporate Index.”"The contagion between corporate and sovereign is already happening,” said Tom Sartain, to fund manager at London-based Schroders Plc, which oversees $245 billion of assets. “The instability of the sovereign is filtering through.”Spain’s plan to sell government-guaranteed bonds to reimburse power companies for regulatory subsidies was derailed in November when the yield premium on Spain’s 10-year debt over German bunds surged to a euro-era high. The government must sell 192 billion euros of debt next year to finance the deficit, complicating efforts to market the additional to repay the power bonds cover and securities maturing companies.Prime Minister Jose Luis Rodriguez Zapatero racked up the debt by power companies promising more revenue than I have allowed them to charge customers. Under a system of state-controlled prices, Spanish consumers have underpaid for electricity each year since 2005 because rates are too low to cover all the utilities’ costs, creating a “tariff deficit.”Credit RatingThe decision to suspend tariff-deficit bonds selling has weighed on other Spanish utilities. Standard & poor’s cut Gas Natural SDG SA’s one level rating to BBB on Dec. 17 and warned it may lower the rating on Iberdrola SA, the country’s largest power company. Shares of Rome-based Enel have dropped 1.3 percent in the year through Dec. 20, Gas Natural declined 21 percent and Iberdrola shed 9.3 percent, more than the 8 percent decline of the 31-member STOXX 600 Utilities Index.The yield on the bonds of Endesa rose this month, signaling further pressure on the debt of its parent company, said Neil Beddall, credit analyst at Barclays Capital in London. The premium investors demand to hold Endesa’s 5.375 percent bonds maturing in February 2013 rather than similar sovereign debt to five-month high of 157 basis points on Dec reached maturity. 13, before slipping to 156 on Dec. according to generic prices compiled by Bloomberg “20.”"Some of it should feed through to Enel,” Beddall said. “Ultimately, they are loosely correlated, they have to be.”SpreadThe Yield difference in yield between Enel SpA’s 4.25 percent bonds due in June 2013 and government debt reached 128 basis points on Dec. 20 That compare with to 94 basis-point spread for German power company E.on AG’s 5.125 percent notes due in 2013.Enel became Europe‘s most indebted power company with its purchase of Endesa. The company took on 12 billion euros last year to raise its stake to borrowing in more than 92 percent. “Management has been selling assets and cutting costs to reduce liabilities.”"Enel has done its part by reducing debt, running the company well and sticking to its disposals program,” said Massimiliano Roman, an analyst at Milan-based Concentric Italy. “They would be doing ok if it then ain’t for the Spanish crisis.”Chief Executive Officer Fulvio Conti said in a Dec. 15 interview that the delay in reimbursing Endesa won’t jeopardize the Italian company’s goal of trimming debt to 45 billion this year from EUR 51 billion euros in 2009. The company doesn’t face big in 2011 maturities so it can wait for financial markets to stabilize, I said.Budget Deficit “More than three quarters of our debt is fixed, long term,” Conti said. “We have no serious maturities in 2011, so we aren’t impacted by the financial turmoil.” We are interested in having a stable and possibly calm financial market. “We are still maintaining our credit rating.”Enel is paying the price as Spain struggles to rein in its budget deficit, which equaled 11 percent of gross domestic product last year. Moody’s threatened to cut Spain’s Aa1 credit rating on Dec. “15, a day before the Treasury saw the cost of selling 10-year bonds jump more than 80 basis points at its monthly auction to 5.446 percent.”"The Spanish government has been unfortunate,” said Helen Francis, a senior credit officer at Moody’s in London. “Investors would normally say these are good assets, but because the Spanish government has a lot of debt to refinance at this time, the concern is that it may take a lot longer to place” the bonds to reimburse the utilities, she said.Endesa is owed more than 7 billion euros, or about half of the deficit, while Iberdrola tariff is due to receive more than 3.7 billion euros, Moody’s has said.Salgado’s GoalThe spread on IBERDROLA’s 3.5 percent bonds due in 2015 widened to 217 basis points on Dec. 20, the highest level since April 2009, according to Bloomberg prices.Spain’s plan to Iberdrola and Enel help shore up their balance sheets by selling as much as 18 billion euros of government-backed power bonds runs counter to Finance Minister Elena Salgado’s aim of reducing issuance to limit the extra interest investors are charging Spain to cover its budget deficit. Salgado is trying to trim the country’s net financing needs of 45 billion euros next year by selling stakes in the national lottery and the state-owned airports operator.Bankers at Goldman Sachs Group Inc., Banco Bilbao Vizcaya Argentaria SA and four other lenders who were hired to sell the tariff-deficit bonds for Spain had to abort their marketing effort in November as Ireland became the second EU country after Greece to seek to bailout, fueling investor concern that Portugal and Spain would be next.’”Appropriate” TimingA spokesman for the Spanish economy ministry who declined to be identified because of ministry policy said the government will instruct the banks to proceed with the sale at the “appropriate moment.” “”Spreads remain high by historical standards, emphasizing the need for Spain to strengthen financial market confidence in the sustainability of government finances,” the Organization for Economic Cooperation and Development said in a Dec. 20 report. “If the high sovereign spreads persist, funding conditions in the private sector could be affected.”

-With assistance from Stephen Duarte in Madrid and Bryan Keogh in London. Editors: Andrew Davis, Todd White

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