Spain Rediscovers the U.S. Debt Market – With a Hand from DTCC‘s Depository

by Edward C. Kelleher

Ignacio Sastriques, head of the funding department of Bancaja

When Spanish lawmakers in 2003 passed tax legislation aimed at combating money laundering and halting terrorist financing, borrowing by Spanish banks in the U.S. market came to an abrupt halt.

Yet by 2005, the market dynamics had changed radically: major Spanish banks and other high-profile borrowers were back in the United States raising billions of dollars of funding. Tax Relief, a service offering of DTCC’s depository subsidiary, played a critical role in this turnaround.

Tax Relief is an electronic communications facility that makes it possible for qualifying beneficial owners of debt and other securities to obtain tax relief at-source or via quick conditional refund on certain foreign income payments that are permitted by tax relief arrangements set up with issuers, agents or the tax authorities of various countries.

Fine points of tax relief

Spain’s 2003 law required that Spanish borrowers collect and file detailed information on the identity of all beneficial holders eligible for “at-source” tax relief. “At-source” relief enables investors to pay a lower tax rate – or in the case of Spain, no tax whatsoever – at the time of a coupon or dividend payment, rather than paying a higher rate upfront and then filing a refund claim.

“The new law immediately created problems for Spanish banks,” said Ignacio Sastriques, head of the funding department of Bancaja, Spain’s first savings bank to tap the U.S. market. “If we were not able to supply all that detailed information to the government, our foreign investors would have to pay withholding taxes of 15% immediately, then file a claim for the tax refund. This would happen every quarter when coupon payments were due.”
Because of the new law, the Spanish banks withdrew from the U.S. market and their debt offerings dropped to virtually zero.

The return

Fast forward to 2005. Banco Santander, Spain’s largest bank, issues a $4 billion debt offering in the United States and goes on to make additional offerings amounting to more than $18 billion in the next two years. Other Spanish banks did the same, including Bancaja, with $3.3 billion in debt offerings, Grupo BBVA, which raised almost $10 billion, and Caja Madrid, with $3.5 billion in debt offerings.

Additional Spanish businesses that came to the United States looking for funding included Telefónica, Spain’s leading telecommunications company, which issued more than $7.5 in debt offerings.

So what happened to change the U.S. debt market? The banks began working with DTC and Acupay System LLC. “DTC and Acupay helped structure the deals,” said Sastriques, “allowing us to obtain at-source tax relief for our investors while helping us meet information requirements of the Spanish government.”

Global tax expertise

DTC’s global tax expertise and broad customer base, combined with Acupay’s communications channels with Spanish tax authorities, reopened the gates for Spanish borrowing in the United States.

“Prior to September 2005, there was not a single dollar of Spanish debt issued in the United States for almost two years,” said Robert Apfel, president of Acupay. “But after we began working with DTC, we saw Spanish debt offerings go from zero to more than $55 billion in two years.”

Key to these developments was DTC’s Tax Relief. “Our Tax Relief service enabled these banks and businesses to make sure their investors got at-source tax relief so dividend or interest payments were not reduced by the Spanish withholding tax,” said William Salva, DTCC group director for Tax. “Tax Relief is fast becoming the industry standard for Spanish debt issues.”

Antonio Torio, head of Capital Markets Funding for Banco Santander, Spain’s largest bank, lauded DTC’s contributions.

“DTC has demonstrated a keen knowledge of the intricacies of cross-border tax arrangements with sensitivity to the needs of Spanish issuers and tax authorities,” he said. “We also appreciate the commitment of DTC’s tax specialists, who have been readily available with expert guidance whenever market-based windows of opportunity mandated rapid deal executions. Through dozens of payment dates over the past 30 months, DTC and Acupay

have accurately processed hundreds of millions of dollars of tax relief on our deals. They’ve been very attentive to the needs of our investors.”

Antonio Torio, Banco Santander’s Capital Markets head of Funding

Global tax relief

In addition to Spain, Tax Relief provides at-source or accelerated tax relief for depository-eligible securities from 14 other countries and territories including Canada, France, Germany, Israel, Ireland, Japan, Korea and the Netherlands. “In 2007 alone, the service will deliver benefits to customers totaling a record $2 billion, an increase of 25% over 2006,” said Salva.

Acupay, with offices in London, New York and Valencia, Spain, works with DTC to transmit securities-related tax information from investors to issuers in a highly secure fashion, thus enabling it to prepare and forward the legally-required investor information to the Spanish tax authorities.

“The U.S. debt market is an important one for Bancaja,” said Sastriques. “DTC and Acupay helped us find our way through the legal process, helped us structure the deals and the documents and, in effect, reopened the U.S. market for all of us in Spain.”  @

[For more information on Tax Relief, contact William Salva, DTCC group director for Tax, at wsalva@dtcc.com or 212.855.5314.]