Announcement follows actions on Spanish banks
Madrid, May 17, 2012 -- Moody's Investors Service has today downgraded the ratings of covered
bonds issued under six programmes of Spanish banks. Moody's
has also affirmed the ratings of covered bonds issued under five programmes.
In addition, the ratings of covered bonds issued under ten programmes
remain or have been placed on review for downgrade. These announcements
were prompted by Moody's decision on 17 May 2012 to downgrade the senior
debt ratings of the banks supporting the relevant covered bond programmes.
Please click this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF285536
for the list of affected covered bond ratings.
For additional information on covered bond ratings, please refer
to the webpage containing Moody's related announcements http://www.moodys.com/eusovereign
Today's downgrades and affirmations conclude the review for downgrade,
initiated on 16 February 2012 (see "Moody's takes negative actions
on 17 Spanish covered bonds" for more details). That review
followed Moody's wider review of European financial institutions driven
in part by (i) the difficult European operating environment caused by
the prolonged euro area crisis; and (ii) the deteriorating creditworthiness
of certain euro area sovereigns (including Spain).
RATINGS RATIONALE
Today's covered bond downgrades and announcements follow Moody's rating
actions on the relevant issuers' senior unsecured ratings (issuer
ratings). Moody's has downgraded the covered bonds issued
under six programmes because of the impact of the issuer rating downgrades
under Moody's Timely Payment Indicator (TPI) framework. The
ratings of covered bonds issued under five programmes have been affirmed.
The affirmations are due to the fact that following the issuer downgrades
(i) the expected loss of the covered bonds remains commensurate with their
current ratings --taking into account the available over-collateralisation;
and (ii) the TPI framework does not constrain the ratings below their
current level. For more information on the rating actions taken
by Moody's Financial Institutions Group, see the press release
"Moody's downgrades Spanish banks; ratings carry negative
outlooks or remain on review for downgrade" published on 17 May
2012. One covered bond rating has been placed on review while Moody's
assesses the level of over-collateralisation the issuer can be
expected to maintain (see further below).
Covered bond ratings are determined after applying a two-step process:
an expected loss analysis and a TPI framework analysis.
(1) Expected Loss Method
Moody's expected loss analysis is negatively affected by the downgrade
of the issuer ratings. As the credit strength of the issuer is
incorporated into Moody's expected loss methodology, any downgrade
of the issuer ratings will increase the expected loss on the covered bonds.
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.
Moody's has placed on review for downgrade BBVA's public-sector
covered bonds, because the rating agency believes that there is
a sufficient degree of uncertainty as to whether BBVA will be able to
sustain over-collateralisation consistent with the current rating
of Aa2 (56%).
Moody's measures the over-collateralisation percentage as
the excess of assets over the issued amount of covered bonds, divided
by the issued amount of covered bonds.
BBVA retains large amounts of public-sector covered bonds on its
balance-sheet. These bonds would be cancelled --
and thus not reduce the over-collateralisation --
if the issuer defaults and the covered bonds are not placed at a third
party. However, in its analysis, Moody's treats
these covered bonds as issued amounts that can be sold or pledged at any
time as collateral with third parties, up to an amount that makes
the issuer reach the statutory 43% over-collateralisation
level.
During the review, Moody's will assess BBVA's willingness
and capacity to further strengthen its programmes by holding sufficient
collateral to support the rating assigned to the covered bonds.
(2) TPI Framework
Moody's Timely Payment Indicator (TPI) framework limits a covered
bond rating to a certain number of rating levels above the issuer rating
of the relevant bank. The amount of uplift will depend on the TPI
assigned and for all Spanish covered bonds Moody's currently assigns
a TPI of "Improbable". The indicative rating uplift for covered
bonds based on TPIs can be found in Moody's published TPI table.
However, Moody's notes that there are many factors that might influence
the application of TPIs, in particular for sub-investment-grade-rated
issuers. For such issuers, factors that influence the maximum
rating achievable include (i) the level of over-collateralisation
held in the programme; and (ii) the degree of adequate asset-liability
matching.
Following the downgrade of Cajamar to Ba2, Moody's downgraded
the corresponding mortgage and public-sector covered bonds to Baa1,
which is one notch above the Baa2 level indicated by the TPI table.
The higher final ratings were driven by a number of factors (i) the limited
rating uplift of four notches over and above the issuer rating; (ii)
high levels of committed over-collateralisation imposed by the
law (25% for mortgage covered bonds and 43% for public-sector
covered bonds); and (iii) the issuer rating not being on review for
further downgrade, which provides the covered bonds with a higher
degree of rating stability.
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. Covered bond ratings
are determined after applying a two-step process: an expected
loss analysis and a TPI framework analysis.
- EXPECTED LOSS: Moody's determines a rating based on the
expected loss on the bond. The primary model used is Moody's Covered
Bond Model (COBOL), which determines expected loss as (i) a function
of the issuer's probability of default (measured by the issuer's rating);
and (ii) the stressed losses on the cover pool assets following issuer
default.
- TPI FRAMEWORK: Moody's assigns a timely payment indicator
(TPI), which indicates the likelihood that timely payment will be
made to covered bondholders following issuer default. The effect
of the TPI framework is to limit the covered bond rating to a certain
number of notches above the issuer's rating.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the issuer's
credit strength.
A multi-notch downgrade of the covered bonds might occur in certain
limited circumstances, such as (i) a sovereign downgrade that negatively
affects both the issuer's senior unsecured rating and the TPI; (ii)
a multi-notch downgrade of the issuer; or (iii) a material
reduction of the value of the cover pool.
As the euro area crisis continues, the covered bond ratings remain
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
affect 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).
Over and above any TPI consideration, country risk constrains the
covered bonds' ratings at Aa2. For further information please
refer to "Moody's lowers the highest achievable covered bond ratings
in Italy, Portugal and Spain following the recent sovereign rating
actions", dated 23 February 2012.
The principal methodology used in these ratings 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.
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 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.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
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 takes multiple actions on Spanish covered bonds
