Madrid, June 27, 2012 -- Moody's Investors Service has today downgraded the ratings of 33 Spanish
covered bonds. At the same time, Moody's maintains
31 covered bond ratings on review for downgrade and six on review with
direction uncertain.
Today's actions follow (i) Moody's lowering of the country ceiling in
Spain to A3; and (ii) the downgrade of several Spanish issuers'
unsecured ratings. Moody's says that today's announcements
are in addition to those previously announced on 13 June 2012, which
were prompted by the downgrade of Spain's government bond ratings to Baa3
on review for downgrade from A3.
Please click this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF290092
for the List of Affected Credit Ratings.
This list is an integral part of this press release and identifies each
affected issuer.
For further details on the lowering of the country ceiling, please
refer to the special comment published on 26 June 2012 (http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_143384).
For more information on the rating actions taken by Moody's Financial
Institutions Group, see the press release published on 25 June 2012.
(http://www.moodys.com/research/Moodys-downgrades-Spanish-banks--PR_249316).
For additional information on covered bond ratings, please refer
to the webpage containing Moody's related announcements http://www.moodys.com/eusovereign.
RATINGS RATIONALE
Following the downgrade of Spain's sovereign rating to Baa3 on review
for downgrade from A3, Moody's has lowered Spain's country ceiling
to A3. Accordingly, ten covered bond ratings in Spain have
now been lowered in line with this limitation.
In addition, the sovereign downgrade has prompted the downgrade
of several Spanish banks that are issuers of covered bonds. Moody's
has therefore downgraded the covered bonds issued under 23 programmes
because of the impact of the issuer rating downgrades under Moody's Timely
Payment Indicator (TPI) framework. Moody's notes that the
TPI for both mortgage and public-sector covered bonds has been
maintained at "Improbable".
Moody's has placed or kept on review for downgrade the ratings of
31 covered bonds because their issuers' ratings are on review for
downgrade. Only in a few instances are the covered bonds ratings
on review with direction uncertain, either because (i) the issuers'
ratings are under review with direction uncertain; or (ii) the entities
are in advanced merger processes with stronger entities that are on review
for downgrade.
The sovereign downgrade impacted the covered bond ratings through:
(1) The Expected Loss
(i) Following Spain's downgrade, the banks that issue covered
bonds have also been downgraded. As the issuer's credit strength
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 increase in refinancing margins observed in Spain. The
weakening economic environment in Spain has resulted in increased funding
costs for both the sovereign and Spanish financial institutions.
Moody's has consequently increased the refinancing margins assumed in
its analysis of Spanish 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.
During the review process -- and based on its revised credit
and market-risk assumptions -- Moody's will
assess the adequacy of the over-collateralisation held by the issuers
to sustain the current covered bond ratings.
(2) The 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; 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.
Therefore, a downgrade of the issuer rating could limit the maximum
covered bond rating uplift.
Based on the current "Improbable" TPI for the Spanish covered bond programmes,
the combination of the (i) lower issuer ratings; (ii) the maximum
covered bond rating achievable; and (iii) the TPIs, constrains
the covered bond ratings of ten programmes.
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 these 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.
For 20 programmes, Moody's downgraded the covered bonds to certain
ratings, which are above the level indicated by the TPI table.
The higher final rating was driven by a number of factors, including
(i) the issuers' ratings, which are at the high end of the
range indicated by the TPI table for a given covered bond rating;
and (ii) high level of over-collateralisation.
Moody's has left the TPIs of the mortgage and public-sector covered
bonds unchanged at Improbable, reflecting (i) the systemic importance
of covered bonds for the funding of Spanish banks, despite the difficulties
the sovereign faces; and (ii) the high level of protection that the
Spanish legal framework for covered bonds provides to covered bond holders.
Unlike in most jurisdictions where the cover pool assets consist of an
earmarked pool, mortgage and public-sector covered bonds
in Spain are secured by the issuer's entire mortgage and public-sector
loan portfolio, respectively. This legal protection provides
a high amount of over-collateralisation, given that the issuer
may only issue mortgage covered bonds for up to 80% of those cover
assets qualifying as eligible and public-sector covered bonds up
to 70% of the public-sector cover pool. 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 quality of the cover pool
assets, especially the exposures to real-estate.
Therefore, Moody's believes that as long as Spain remains rated
investment-grade, the TPIs can remain at "Improbable".
However, Moody's notes that the TPIs might be lowered further if
(i) Moody's downgrades Spain's sovereign rating; or (ii)
the economic environment within Spain worsens.
(3) Highest rating achievable
As a consequence of Moody's rating action on the sovereign, Moody's
has lowered Spain's country ceiling to A3.
Spain's new country ceiling relates to Moody's assessment of increased
risks for economic and financial instability in the country. The
weakness of the economy and the increased vulnerability to a sudden stop
in funding for the sovereign constitute a substantial risk factor to other
(non-government) issuers in Spain as income and access to liquidity
and funding could be sharply curtailed for all classes of borrowers.
Further deterioration in the financial sector cannot be excluded,
which could lead to potentially severe systemic economic disruption and
reduced access to credit. Finally, the ceiling reflects the
risk of exit and redenomination in the unlikely event of a default by
the sovereign. If the Spanish government's rating were to
fall further from its current Baa3 level, the country ceiling would
likely be reassessed at that time.
As a result, no Spanish covered bond can be rated above A3.
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 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 ratings of covered bonds
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 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". Furthermore,
as discussed in Moody's special report "Rating Euro Area Governments Through
Extraordinary Times -- An Updated Summary," published
in October 2011, Moody's is considering reintroducing individual
country ceilings for some or all euro area members, which could
affect further the maximum structured finance rating achievable in those
countries. Moody's is also continuing to consider the impact of
the deterioration of sovereigns' financial condition and the resultant
asset portfolio deterioration in covered bond transactions.
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
Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF290092
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 item:
• 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 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.
The relevant Releasing Office for each rating is identified under the
Debt/Tranche List section on the Ratings tab of each issuer/entity page
on moodys.com
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
