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Bond Default

Bondholders of Spanish foreign bonds have given Spain notice that the government is in technical default because it hasn’t cleared debts linked to the long-running dispute over soured investments in renewable energy.

Blasket Renewable Investments LLC wants Spain to speed up payment of a £200 million ($248 million) note due in 2029 after the country failed to settle about $1.4 billion in arbitration awards related to the cancellation of renewables incentives.

The investment vehicle claims that Spain’s failure to settle has triggered cross-default provisions in the bond contract that mean the country is in technical default. Blasket’s warning to Spain is the latest in a long line of legal tussles linked to the way the country shifted the goalposts for investors drawn by a 2007 pledge of incentives to spur funding for renewable energy projects. After 2011, a former People’s Party government completed the withdrawal of the attractive terms as it sought to rein in a fiscal deficit.

Cross-Default Clause

When Spain issued the notes in 1999, it did so under a program that included wording saying that non-payment by the issuer of principal or interest on any indebtedness would trigger a cross-default, according to the bond documentation. The program includes three other notes outstanding — in dollars, yen and euros — amounting to $817 million with similar cross-default wording, according to bond documents. That means Spain could face early redemption requests on as much as $1.1 billion-equivalent of debt. Blasket sent notice of the event of default to Spain in a batch of letters over the past two months. The government acknowledged receipt and said it would respond in due course. Spain has said in the past that it’s waiting for an analysis by the European Commission to determine whether paying the arbitration awards would constitute state aid.

The way the bond is structured, with a fiscal agent instead of a trustee, allows any individual holder to issue a technical default notice. Under a more common structure with a trustee, 25% of holders would need to ask for the default to be called.

This also has serious implications for a potential downgrading of Spain's credit rating, cost of borrowing and interest rates on the international money markets.

The Saga