Announcements follow rating actions on Spanish banks and bank mergers
Madrid, May 18, 2012 -- Moody's Investors Service has today taken multiple actions on various
Spanish multi-issuer covered bonds (SMICBs, or multi-cedulas).
In summary, Moody's has (i) downgraded five series of SMICBs;
(ii) for 52 series of SMICBs placed the ratings on review with direction
uncertain where previously they were on review for downgrade; and
(iii) for two series of SMICBs placed the ratings on review for upgrade.
In addition, the ratings of eight SMICBs remain placed on review
for downgrade.
These downgrades and announcements were prompted by (i) Moody's decision
on 17 May 2012 to downgrade the senior debt ratings (issuer ratings) of
the banks participating in the relevant covered bond programmes;
and (ii) the recent mergers announced since the last review in February
2012, between stronger banks and weaker ones.
Please click this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF285537
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.
RATINGS RATIONALE
The ratings of five series of SMICBs have been downgraded following (i)
the issuer rating downgrades of some participating issuers; and (ii)
the limitations imposed by the lower ratings of the weakest entities in
such series as a result of these downgrades. 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. The rating actions on the issuers'
ratings conclude the review for downgrade of Spanish banks, initiated
on 15 February 2012 (see "Moody's Reviews Ratings for European Banks").
That review was part of 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).
The change in direction of the rating review for 52 series of SMICBs --
to review uncertain from review for downgrade -- is the
result of the consolidation process between the strongest issuers and
some of the weakest ones participating in those series. Due to
the mergers between these entities, the weakest credit links in
some series have been strengthened. Examples of such mergers include
the merger of BBVA with Unnim and Caixabank with Banca Cívica.
Despite the consolidation, Moody's has changed the review
direction to uncertain because (i) for the 52 series, there are
some participating issuers whose ratings are on review for downgrade;
and (ii) the Spanish banking system remains under considerable pressure.
Whether the ratings of some of the 52 series are downgraded will largely
depend on the conclusion of the issuer rating reviews.
Only in two series (Cédulas TdA 20, FTA, series A1
and series A2) are none of the participating issuers on review for downgrade,
and Moody's believes that the impact of the merger of Caixabank
with Banca Cívica is credit positive. Moody's has
therefore decided to place both series on review for upgrade.
Moody's has decided to keep on review for downgrade those series
where (i) there is no participating issuer positively affected by the
mergers; and (ii) some issuers are on review for downgrade.
Moody's also notes that the downgrade or potential downgrade of some of
the parties (to below A3 and/or Prime-1) that act as paying agents,
liquidity facility providers or account banks, will activate some
replacement triggers within the transactions. Moody's will monitor
the actions that the Management Companies of the SMICBs and affected entities
take in order to replace or guarantee the non-eligible counterparties.
The issuers' rating changes have affected the SMICBs through their
effect on both Moody's expected loss analysis and timely payment considerations.
- EXPECTED LOSS:
As the issuer's credit strength is incorporated into Moody's expected
loss assessment, any downgrade of the issuer's rating will increase
the expected loss on the covered bonds; similarly, any upgrade
will decrease the expected loss on the covered bonds.
The individual impact on the underlying participating issuers will in
turn affect the expected loss on the SMICBs, as their expected loss
is primarily determined by the weighted-average expected loss of
the covered bonds backing those SMICBs.
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 further notes that if the banks' senior
debt ratings are downgraded below a threshold level in the single-A
category, the credit that Moody's gives to the over-collateralisation
held in the cover pool may be limited if such over-collateralisation
is not considered "committed." Moody's considers over-collateralisation
to be "committed" if the issuer's discretion to remove the collateral
is sufficiently restricted.
- TIMELY PAYMENT:
Moody's timely payment analysis constrains some of its current SMICB ratings.
The level of liquidity, or the reserve fund necessary for the bonds
to reach a given rating level, depends on the ratings of the participating
covered bonds issuers that back the SMICBs, as well as the probability
of timely payment of 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
rating of the weakest issuers within a series.
KEY RATING ASSUMPTIONS/FACTORS
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.
Country risk constrains the SMICBs' ratings to 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 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 credit
strength of the underlying issuer.
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 this rating 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
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 multi-cedulas
