Madrid, June 16, 2009 -- Moody's Investors Service has downgraded the ratings of two mortgage covered
bonds (Cédulas Hipotecarias or CHs) programmes and two public-sector
covered bonds (Cédulas territoriales or CTs) programmes (see list
below). At the same time, it has confirmed the Aaa ratings
of three public-sector programmes (see list below). The
ratings of six other programmes of CHs, one programme of CTs and
59 series of Spanish Covered Bonds issued under multi-issuer covered
bond programmes remain on review for possible downgrade.
The rating actions follow rating downgrades taken by Moody's Financial
Institutions Group on the underlying institutions supporting these Covered
Bonds and are a consequence of the timely payment limitations imposed
on the Covered Bond ratings given the linkage to the issuers' ratings.
For further information on the rating actions taken by Moody's Financial
Institutions Group, please refer to "Moody's downgrades senior ratings
of 25 Spanish banks" published on 15 June 2009 on www.moodys.com.
Moody's aims to conclude its reviews of the vast majority of the
single-issuer covered bond programmes in the next few weeks,
once it has clarified the willingness and capability of the issuers to
maintain a certain level of over-collateralisation (OC) over and
above the mandatory level of 25% required by law.
Moody's has decided to keep the ratings of the Covered Bonds issued
under multi-issuer covered bond programmes under review due to
initiatives presented by some of the participants to enhance the programmes,
which have not yet been concluded. Moody's expects to conclude
this review in the next few months.
DOWNGRADE OF SINGLE ISSUERS' COVERED BONDS
The downgrades of the ratings of the single issuers' covered bond
programmes have been driven by the ratings constraints by timely payment
considerations.
Under Moody's rating methodology for Covered Bonds, the ratings
assigned to Covered Bonds are constrained by the combination of the credit
strength of the Issuer and the Timely Payment Indicator (TPI) for the
Covered Bonds. (For further details, please see "Timely Payment
in Covered Bonds following Sponsor Bank Default" on www.moodys.com).
The primary reason for the TPI constraint is the uncertainty surrounding
refinancing risk following an Issuer default, which could diminish
the probability of full and timely payments under the Covered Bonds.
This probability further decreases as the Issuer's rating deteriorates.
As is the case for other Covered Bonds, Spanish Cédulas are
exposed to refinancing risk. This arises following an Issuer default.
When this happens, the Covered Bond must be repaid from the assets
it is backed by. For "bullet bonds", the natural
amortisation of the assets cannot be relied on to repay the bonds.
This means that funds need to be raised against the assets backing the
Covered Bond, possibly through the firesale of the assets.
The discount on the price achieved to complete this firesale, in
the potentially stressed environment following the default of the bank
that originated these assets, is referred to as refinancing risk.
Although the Spanish Legislation stipulates the redirection of all cash
flows stemming from the CH Cover pool to the CH holders in an insolvency
situation and even stipulates that the insolvency administrator of CHs
should avoid any payment shortfall, there are no legal provisions
ensuring a perfect match between assets and notes. Moreover,
the credit deterioration of mortgage Cover Pools and high concentration
to real-estate developers negatively impacts the liquidity of such
assets and their timely enforcement. For public-sector Covered
Bonds, although the credit deterioration of assets is much less
pronounced, the Legislation has not been modified, unlike
that governing mortgage Covered Bonds, which was amended in December
2007. This means that there is still some uncertainty regarding
the ability of the administrator to raise bridge funding against the Cover
Pool.
Moody's considers that Spanish Covered Bonds entail a certain degree
of refinancing risk. The published TPIs currently assigned to CH
and CT programmes are "Probable" and "Probable-High",
respectively.
Under Moody's methodology, a TPI of "Probable" combined with an
Issuer long-term debt rating below A3 would constrain the rating
of the Covered Bonds to Aa1 or below. CHs issued by entities whose
long-term rating could be downgraded below A3 have been placed
on review for possible downgrade. Similarly, a TPI of "Probable-High"
would constrain the Aaa ratings of CTs for issuers rated below A3.
In addition, the respective committed levels of OC for CHs are no
longer sufficient under the expected loss analysis for some transactions
to maintain their current ratings or even lower ratings. This also
applies to CH programmes which have not been put on review for possible
downgrade, but whose long-term ratings were downgraded down
to A3.
Since the issuers' debt ratings were downgraded below A3,
Moody's only takes into consideration in its analysis amounts of
OC regarded as committed. Moody's currently regards the statutory
level of 25% over the eligible Cover Pool as the committed level
of OC. The rating agency regards OC as committed if the Issuer
has a legal obligation to provide it, either by incorporating it
into the terms and conditions of the notes, or any other type of
arrangements making the obligation irrevocable, as long as the Issuer's
rating is below A3, and legally valid, binding and enforceable
by the investors. Despite the fact that the Spanish CHs benefit
from the whole mortgage Cover Pool as security and thus current OC levels
are very high, nothing prevents the Issuers from issuing further
CHs or securitising large pools either of eligible or ineligible assets,
which could rapidly erode the protection levels. This is proved
by the fact that many issuers are very close to the 25% statutory
level compared with last year. In some cases this threshold has
been hit, which has forced issuers to remedy a breach following
the steps enshrined in the law.
The following Covered Bond programmes of single issuers have been downgraded:
1) Caja Insular de Ahorros de Canarias: mortgage Covered Bonds
Downgraded to Aa1 from Aaa on review for downgrade. TPI:
Probable.
This action follows the downgrade of the Issuer's long-term
debt rating to Baa1 from A3.
Previous rating action: Aaa on review for possible downgrade on
20 May 2009.
2) Caja de Ahorros Municipal de Burgos: mortgage Covered Bonds
Downgraded to Aa1 on review for possible downgrade from Aaa on review
for downgrade. TPI: Probable.
This action follows the downgrade of the Issuer's long-term
debt rating to Baa1 from A3.
Previous rating action: Aaa on review for possible downgrade on
28 November 2008.
3) Caja de Ahorros de Castilla La Mancha: public-sector Covered
Bonds.
Downgraded to Aa3 from Aa1 on review for downgrade. TPI:
unpublished as the issuer is not publicly rated by Moody's. This
action concludes the review initiated on 19 December 2008
4) Dexia Sabadell, S.A.: public-sector
Covered Bonds.
Downgraded to Aa2 from Aa1 on review for downgrade. TPI:
Probable-High. This action concludes the review initiated
on 23 February 2009. The issuer's long-term rating
is Baa2 and the TPI constrains the covered bond rating to Aa2.
CONFIRMATION OF SINGLE ISSUERS' COVERED BONDS
The Aaa ratings of three public-sector covered bond programmes
(CTs) were confirmed following the downgrade of the issuers to A3.
Given that the TPI for these programmes are "Probable-High",
the ratings on the covered bonds are not subject to any rating limitation.
Furthermore, the statutory OC level of 42.85% ensures
an expected loss commensurate with Aaa ratings.
The following public-sector Covered Bond programmes of single issuers
have been confirmed:
1) Caixa Catalunya:
Aaa Public-Sector Covered Bonds confirmed. TPI: Probable-High.
This action follows the downgrade of the Issuer's long-term
debt rating to A3.
Previous rating action: Public-sector covered bonds on review
for possible downgrade on 20 May 2009
2) Caixa Galicia:
Aaa Public-Sector Covered Bonds confirmed. TPI: Probable-High.
This action follows the downgrade of the Issuer's long-term
debt rating to A3.
Previous rating action: Public-sector covered bonds assigned
Aaa on 20 May 2009.
3) Caja de Ahorros del Mediterráneo (CAM):
Aaa Public-Sector Covered Bonds confirmed. TPI: Probable-High.
This action follows the downgrade of the Issuer's long-term
debt rating to A3.
Previous rating action: Public-sector covered bonds assigned
Aaa on 20 May 2009.
REVIEW OF SINGLE ISSUERS' COVERED BONDS
Moody's is continuing its review for possible downgrade of the Aaa
ratings of six other programmes of CHs and one programme of CTs,
which were placed on review on 20 May 2009. Please refer to "Moody's
reviews Spanish covered bond ratings for possible downgrade" published
on 20 May 2009 on www.moodys.com.
Although the issuers' public long-term ratings were not downgraded
below A3, and thus are not constraining the rating due to timely
payment considerations, the expected loss is only compatible with
Aaa ratings if certain levels of OC over and above the statutory levels
are maintained.
Moody's expects to conclude this review in the next few weeks,
once it confirms the willingness and capability of the issuers to hold
adequate levels of OC adequate for a Aaa ratings.
REVIEW OF MULTI-ISSUERS COVERED BONDS
Moody's is continuing its review for possible downgrade of the Aaa ratings
of 59 Series of Spanish Covered Bonds issued under multi-issuer
covered bond programmes. The review was initiated on 12 January
2009 when three Series were placed on review for possible downgrade,
followed by further reviews, which were announced on 20 May 2009.
Moody's is considering some issuers' proposals for enhancing
structures, such as the commitment of voluntary OC by lower rated
entities. Moody's will also consider in its analysis whether
the liquidity facilities or reserve funds to protect possible interest
payment shortfalls are sized properly to Aaa ratings.
Similar to the considerations for Cédulas issued by single issuers,
the respective committed levels of OC for CHs are no longer sufficient
under the expected loss analysis for some low rated entities to maintain
the current ratings or even lower ratings. Therefore, Moody's
will only consider committed OC under its analysis for such lower rated
entities.
Moody's also highlights that some participants of Spanish multi-issuer
have not yet been assigned a monitored rating. As part of its continuing
effort to enhance the quality and the accuracy of its covered bond ratings,
Moody's announced in April 2009 that a key criterion in its rating of
covered bonds is for the issuing financial institution to have obtained
a monitored rating. (see press release "Moody's: Covered
bond issuer ratings important for accuracy and stability of covered bond
ratings" dated 30 April 2009).
Moody's initially analysed and currently monitors these transactions using
the rating methodology for EMEA Covered Bond transactions as described
in the Rating Methodology reports "Moody's Rating Approach to European
Covered Bond", published in June 2005, "Timely Payment in
Covered Bonds following Sponsor Bank Default", published in March
2008 and "Assessing Swaps as Hedges in the Covered Bond Market",
published in September 2008. All can be found on www.moodys.com
in the Credit Policy & Methodologies directory, within the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating this issue can also
be found in the Credit Policy & Methodologies directory.
The ratings assigned by Moody's address the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction.
Other non-credit risks have not been addressed, but may have
a significant effect on yield to investors.
Madrid
Juan Pablo Soriano
Managing Director
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Madrid
Jose de Leon
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades four Spanish covered bond programmes; confirms Aaa ratings of three
