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Rating Action:

Moody's downgrades or reviews for downgrade multiple Spanish covered bonds

20 Oct 2011

Madrid, October 20, 2011 -- Moody's Investors Service has today downgraded or placed on review for downgrade the ratings of various covered bonds issued by Spanish banks. The downgrade of the Spanish sovereign to A1 and the downgrades of various banks supporting the covered bond programmes have prompted the various negative rating actions on the covered bonds.

The following covered bonds have been downgraded:

- Public-sector covered bonds issued by Banca Cívica: downgraded to A2 on review for downgrade, previously Aa3 on review for downgrade first rating assigned on 27 June 2011.

- Public-sector covered bonds issued by Banco CAM: downgraded to Baa2 on review with direction uncertain, previously A3 placed on review for downgrade on 12 September 2011.

- Public-sector covered bonds issued by Banco CCM: downgraded to A2 on review for downgrade, previously Aa3 placed on review for downgrade on 21 December 2010.

- Public-sector covered bonds issued by Banesto: downgraded to Aa1, previously Aaa first rating assigned on 4 November 2010.

- Public-sector covered bonds issued by Bankia: downgraded to A1, previously Aa2 first rating assigned on 8 July 2011.

- Public-sector covered bonds issued by Catalunya Banc: downgraded to Baa2, previously A3 first rating assigned on 30 September 2011.

- Public-sector covered bonds issued by Dexia Sabadell: downgraded to A1 on review for downgrade, previously Aa2 placed on review for downgrade on 12 July 2011.

- Public-sector covered bonds issued by NCG Banco: downgraded to A2 on review for downgrade, previously Aa3 on review for downgrade first rating assigned on 4 October 2011.

The following covered bonds have been placed on review for downgrade:

- Public-sector covered bonds issued by Banco Santander: Aaa on review for downgrade, previously upgraded to Aaa on 21 November 2003.

- Public-sector covered bonds issued by BBVA: Aaa on review for downgrade, previously Aaa first rating assigned on 5 December 2006.

- Mortgage covered bonds issued by Banco Sabadell: Aaa on review for downgrade, previously Aaa confirmed on 25 March 2011.

The following covered bonds have been placed on review with direction uncertain:

- Mortgage covered bonds issued by Banco CAM: Baa1 on review with direction uncertain, previously Baa1 placed on review for downgrade on 12 September 2011.

RATINGS RATIONALE

Moody's downgrade of the Spanish sovereign and subsequent downgrades of some of the issuing banks have had a negative effect on two components of Moody's analysis of covered bonds. First, for public-sector covered bonds, Moody's has reduced the Timely Payment Indicator (TPI) for all programmes to Improbable from either Probable-High or Probable, reflecting our view that timely payment of the bonds has become less likely, if the issuer defaults. Second, the sovereign and bank rating actions have had a negative effect on Moody's expected loss analysis of the covered bonds.

Moody's downgraded Spain's sovereign debt rating to A1 from Aa2 on 18 October 2011. For more information, please refer to the press release "Moody's downgrades Spain's government bond ratings to A1, negative outlook". Moody's Financial Institutions Group then downgraded some Spanish banks on 19 October 11, as discussed in the press release "Moody's downgrades five Spanish banks following Spain's downgrade to A1".

The rating assigned to the existing covered bonds is expected to be assigned to all subsequent covered bonds issued by the issuers under these programmes and any future rating actions are expected to affect all such covered bonds. If there are any exceptions to this, Moody's will, in each case, publish details in a separate press release.

TIMELY PAYMENT INDICATORS

Moody's has lowered the TPIs of public-sector covered bonds in Spain to Improbable from either Probable-High or Probable. Public-sector cover pools in Spain are highly exposed to any worsening in the sovereign's credit strength. As the credit strength of the sovereign declines, the Spanish government and financial institutions may be less able and/or willing to provide or obtain funds to support the refinancing of covered bonds, after an issuer default. In addition, the collateral comprising public-sector loan pools backing the covered bonds is becoming less creditworthy and therefore less attractive to potential buyers or providers of funding, with significant discounts likely to be required if the issuer defaults and the pool has to be liquidated. Deterioration in the fiscal and debt positions of the sovereign, regions, and municipalities of Spain have lowered the credit quality of Spanish public-sector loan pools.

Moody's has left the TPIs of the mortgage covered bonds unchanged at Probable, reflecting (i) the systemic importance of mortgage covered bonds for the funding of Spanish banks, despite the difficulties the sovereign faces; and (ii) the high level of protection provided to covered bond holders by the Spanish legal framework governing mortgage covered bonds. Unlike in most jurisdictions where the cover pool assets consist of an earmarked pool, mortgage covered bonds in Spain are secured by the issuer's entire mortgage loan portfolio. This provides a high amount of over-collateralisation given that the issuer may only issue covered bonds for up to 80% of those cover assets qualifying as eligible. High amounts of over-collateralisation can compensate for the higher discount prices, if the insolvency administrator has to sell the assets to meet payments under the bonds. This is an important consideration in light of the deterioration of the credit strength of the cover assets, especially in their exposures to real-estate developers.

Therefore, Moody's believes that the downgrade of the sovereign to A1 does not increase the probability of late payments on mortgage covered bonds to the extent it changes their current TPI. However, Moody's notes that a further downgrade of the Spanish sovereign or a worsening of the economic environment could cause a lowering of the TPIs.

The lowering of the TPI for public-sector covered bonds now constrains the covered bonds ratings of the following eight programmes:

- Banca Cívica public-sector covered bonds capped at A2. The rating is kept on review for downgrade.

- Banco CAM public-sector covered bonds capped at Baa2. The rating has been placed on review with direction uncertain.

- Banco CCM public-sector covered bonds capped at A2. The rating is kept on review for downgrade.

- Banesto public-sector covered bonds capped at Aa1.

- Bankia public-sector covered bonds capped at A1.

- Catalunya Banc public-sector covered bonds capped at Baa2.

- Dexia Sabadell public-sector covered bonds capped at A1. The rating is kept on review for downgrade.

- NCG Banco public-sector covered bonds capped at A2. The rating is kept on review for downgrade.

The rating of the covered bonds issued by Banca Cívica remains on review for downgrade until Moody's concludes the assignment of a final rating to this entity.

The ratings of the covered bonds issued by Banco CAM have been placed rating review, direction uncertain, because the issuer's long-term senior unsecured ratings are on direction uncertain (since 17 October 2011). For further details please refer to "Moody's downgrades Banco CAM's standalone ratings to E+/B3; confirms debt ratings at Ba1, all ratings on review with direction uncertain " published on 17th October 2011

The rating of the covered bonds issued by Banco CCM remain on review for downgrade, given the uncertainties surrounding the parent's commitment towards this entity's covered bond programme.

The rating of the covered bonds issued by Dexia Sabadell remains on review for downgrade, because the issuer's long-term senior unsecured ratings remains under review.

The rating of the covered bonds issued by NCG Banco remains on review for downgrade, because the issuer's long-term senior unsecured ratings remains under review.

EXPECTED LOSS ANALYSIS

Moody's expected loss analysis for all Spanish covered bonds has been negatively impacted by:

(i) Downgrades of the banks that have issued the covered bonds. As the credit strength of the issuer is incorporated into Moody's expected loss methodology, any downgrade of the issuer's ratings will increase the expected loss on the covered bonds.

(ii) The downgrade of the sovereign debt rating. Moody's covered bond analysis captures the risk of a sovereign default when the rating of the covered bonds exceeds the sovereign debt rating by more than a set number of notches. When this happens to a programme, Moody's may assume higher stress scenarios when modelling the collateral backing the covered bonds, to account for losses in the event of a sovereign default.

(iii) The increase in refinancing margins observed in Spain. The weakening economic environment in Spain has resulted in an increase in funding costs for the sovereign and financial institutions. Moody's has consequently increased the refinancing margins used in its analysis of Spanish covered bonds.

Moody's notes that issuers may be able to offset any increase in expected loss by adding further collateral or otherwise restructuring their programmes. However, in the case of issuers with covered bonds currently rated Aaa, large amounts of additional collateral (over and above the statutory levels) would be necessary to maintain expected loss consistent with a Aaa rating. Moody's has therefore placed the following covered bonds on review for downgrade:

- Banco Santander's public-sector covered bonds, Aaa on review for downgrade

- BBVA's public-sector covered bonds, Aaa on review for downgrade

- Banco Sabadell's mortgage covered bonds, Aaa on review for downgrade

During the review, Moody's will assess the willingness and capacity of the issuers to further strengthen their programmes by adding more collateral to support the rating assigned to the covered bonds.

RATING METHODOLOGY

Moody's determines the rating for any covered bond after applying a two-step process:

(1) Moody's determines a rating based on the expected loss on the bond. This is modelled as a function of the issuer's probability of default and the stressed losses on the cover pool assets following issuer default; and

(2) Moody's assigns a TPI, which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI is to limit the covered bond rating to a certain number of notches above the issuer's rating.

The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds, published in March 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The rating assigned by Moody's addresses 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 and to investors.

The lead analyst and rating office for each of the transactions affected are generally different from the contact and office listed at the end of this press release. For each transaction, the lead analyst name is available on the issuer page and the rating office is available on the ratings tab of the issuer on www.moodys.com.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Jose de Leon
Senior Vice President
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Juan Pablo Soriano
MD - Structured Finance
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades or reviews for downgrade multiple Spanish covered bonds
No Related Data.
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