Announcements follow downgrade of Spain's government bond rating
Madrid, June 15, 2012 -- Moody's Investors Service has today changed the review placement of the
ratings of 52 Spanish multi-issuer covered bonds (SMICBs or multi-cedulas)
to review for downgrade from review direction uncertain, and two
to review for downgrade from review for upgrade. In addition,
the rating of one additional SMICB has been placed on review for downgrade.
The ratings of eight nulti-issuer covered bonds remain under review
for downgrade.
Moody's review will assess the degree to which the sovereign downgrade
has the potential to affect the covered bond ratings through both the
expected loss and TPI framework analysis.
Today's rating announcements reflect the weakening of the Spanish government's
creditworthiness, as captured by Moody's downgrade of Spain's government
bond ratings to Baa3 from A3 on 13 June 2012, and the initiation
of a review for further downgrade. For more details on the rationale
for the sovereign downgrade, please refer to the press release (http://www.moodys.com/research/Moodys-downgrades-Spains-government-bond-rating-to-Baa3-from-A3--PR_248236).
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF289120
for the List of Affected Credit Ratings.
This list is an integral part of this press release and identifies each
affected issuer. For additional information on covered bond ratings,
please refer to the webpage containing Moody's related announcements http://moodys.com/eusovereign.
RATINGS RATIONALE
Today's announcements follow Moody's downgrade of Spain's
sovereign rating to Baa3 on review for downgrade from A3. Following
this sovereign rating action, Moody's has placed or kept on
review for downgrade the ratings of all SMICBs. These actions reflect
the potential negative impact of the sovereign rating on the various components
of Moody's analysis of Spanish covered bonds and SMICBs.
Firstly, the sovereign downgrade and the continued weakness of the
Spanish economy might have a negative effect on Moody's expected loss
analysis of the covered bonds backing the SMICBs, through,
amongst other factors (i) the refinancing margins; and (ii) credit-risk
deterioration of the underlying mortgage assets backing the covered bonds.
Secondly, the likelihood of timely payment for the covered bonds
could be reduced.
Moody's review will assess whether the sovereign downgrade might
affect the SMICBs' ratings through:
(1) The Expected Loss
Moody's will take a view on the increased expected loss borne by
the covered bonds backing the SMICBs, as a consequence amongst other
factors, of the following:
(i) The increased funding costs for the sovereign. Therefore,
Moody's will reconsider the refinancing margins it uses in its analysis
of Spanish covered bonds.
(ii) The credit deterioration of the underlying cover pools might accelerate,
especially for public-sector assets, due to the sovereign
downgrade.
However, Moody's notes that issuers may be able to offset any deterioration
in the expected loss analysis if sufficient collateral is held in the
cover pool.
(2) Timely payment considerations
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. Following the downgrade of the sovereign,
Moody's will reassess whether the current timely payment considerations
on the underlying covered bonds and SMICBs are appropriate.
Moody's timely payment analysis constrains some of the currently affected
SMICB ratings. The level of liquidity, or the reserve fund
necessary for the bonds to reach a given rating level, depends on
(i) the ratings of the participating covered bond issuers that back the
SMICBs; and (ii) the probability of timely payment for the underlying
mortgage covered bonds.
Irrespective of the size of the reserve or the liquidity facility,
Moody's limits the maximum rating uplift of an SMICB over and above the
ratings of the weakest issuers within a series.
KEY RATING ASSUMPTIONS/FACTORS
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.
SMICBs can be considered as a repackaging of a pool of Spanish covered
bonds. Each SMICB is backed by a group of Spanish covered bonds
(Cédulas Hipotecarias, CHs) that are bought by a Fund,
which in turn issues SMICBs. Moody's rating for any SMICB is determined
after applying a two-step process:
First step: Moody's determines a rating based on the expected loss
on the SMICB.
The main driver of the expected loss (EL) of a SMICB is the credit strength
of the CHs backing the SMICBs. If the CHs perform, the SMICBs
will be fully repaid. CHs are rated according to Moody's published
covered bond methodology. In the absence of any other support (for
example, such as a reserve fund), the EL of the SMICB is determined
directly from the weighted-average EL (weighted by their outstanding
amounts) of the CHs backing the SMICB.
The primary model used is Moody's Covered Bond Model (COBOL), which
determines EL as a function of (i) the issuer's probability of default
(measured by its long-term rating); and (ii) the stressed
losses on the cover pool assets, following issuer default.
Second step: A secondary rating target for SMICBs is the timely
payment.
Under the SMICB rating approach, Moody's gives value to two primary
liquidity supports that improve the probability of timely payment if any
CH backing the SMICBs fails to make a payment on a scheduled payment date.
These are (i) the maturity extension on the SMICBs, which should
ensure that a period of at least two years is available following any
default on the CH (this period would be available to realise the value
of the assets backing the CH); and (ii) a liquidity facility (LF)
that is available to cover interest payments on the SMICBs. Under
the SMICB rating method, the LF benefiting any SMICB can be sized
to improve the timely payment of the SMICB to a level commensurate with
the SMICBs' ratings.
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.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the underlying
issuer's credit strength.
A multiple-notch downgrade of the covered bonds might occur in
certain limited circumstances, such as (i) a sovereign downgrade
negatively affecting the issuers' senior unsecured rating; (ii) a
multiple-notch downgrade of the issuers or downgrade to low sub-investment
grade; or (iii) a material reduction of the value of the cover pool.
As the euro area crisis continues, the rating of covered bonds remains
exposed to the uncertainties of credit conditions in the general economy.
The deteriorating creditworthiness of euro area sovereigns as well as
the weakening credit profile of the global banking sector could negatively
impact the ratings of covered bonds. For more information please
refer to the Rating Implementation Guidance published on 13 February 2012
"How Sovereign Credit Quality May Affect Other Ratings". Please
also refer to the recent rating actions on banks published on 15 February
2012, (please see "Moody's Reviews Ratings for European Banks" and
"Moody's Reviews Ratings for Banks and Securities Firms with Global Capital
Markets Operations" for more information).
The methodologies used in these ratings were "Moody's Approach to Rating
Covered Bonds", published in March 2010 and " Moody's Approach to
Rating Spanish Multi-Issuer Covered Bonds," published in
September 2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
REGULATORY DISCLOSURES
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF289120
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and provides, for each of the credit
ratings covered, Moody's disclosures on the following items:
• Releasing office
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 ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings 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 entities or their related third parties within
the two 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 the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
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 places 55 Spanish multi-cedulas on review for downgrade; eight remain on review for downgrade
