Announcement follows actions on Spain's sovereign rating and Spanish banks
Madrid, February 16, 2012 -- Moody's Investors Service has today downgraded the ratings of various
multi-issuer covered bonds (SMICBs, or multi-cedulas),
while continuing its review for further downgrade. This follows
Moody's decision earlier this week to downgrade Spain's sovereign
rating to A3 from A1 and to subsequently initiate reviews for downgrade
of the senior debt ratings of the various Spanish banks supporting the
covered bond programmes.
For full details, please refer to the webpage containing all Moody´s
related announcements.
http://www.moodys.com/newsandevents/topics/euro-area-sovereign-crisis-affected-credits/-/007022/-/-/0/0/-/0/-/-/en/global/rr?WT.mc_id=home_banner_EUPressurePR
Please click on this http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF276644
for the List of Affected Credit Ratings. This list is an integral
part of this Press Release and identifies each affected issuer.
RATINGS RATIONALE
Moody's decision to downgrade the SMICBs was prompted by the negative
effects on the rating agency's covered bond analysis stemming from
its downgrade of Spain's sovereign rating. The rating agency's
decision to continue reviewing the covered bonds for further downgrade
was primarily prompted by the negative effects on Moody's covered
bond analysis as a result of its recently initiated reviews for downgrade
of the senior debt ratings of the banks supporting the covered bonds.
The continued review will also assess the impact of the sovereign downgrade
on Moody's expected loss analysis.
The sovereign rating downgrade and reviews for downgrade of the underlying
issuing banks have negatively affected the SMICBs through their effect
on both Moody's expected loss analysis and timely payment considerations.
Moody's notes that the majority of Spanish SMICBs remain on review for
downgrade either because some of the participants' ratings are still on
review for downgrade, or rating assessments are ongoing after merger
announcements amongst participants.
Moody's also notes that the downgrade or potential downgrade of
some of the parties, which act as paying agents, liquidity
facility providers or account banks, to below Prime-1 will
activate some replacement triggers. Moody's will closely
monitor the actions taken by the Management Companies of the SMICBs and
affected entities in order to remedy the rating downgrades.
- EXPECTED LOSS ANALYSIS:
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. Furthermore, following
the downgrade of the sovereign, Moody's will reassess:
(i) the refinancing margins; and (ii) in line with the lowering of
the timely payment indicator (TPI) to "Improbable" from "Probable"
for the underlying mortgage covered bonds backing the SMICBs, the
likelihood that covered bonds may suffer a late payment following issuer
default.
This, in turn, affects the expected loss on the SMICBs,
as their expected loss is primarily determined by the weighted-average
expected loss of the covered bonds backing them.
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 senior debt
rating of the banks is 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.
- TPI FRAMEWORK:
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
issuers of the covered bonds that back the SMICBs, as well as on
the probability of timely payment of the underlying mortgage covered bonds.
In line with the lowering of the timely payment indicator (TPI) to "Improbable"
from "Probable" for the underlying mortgage covered bonds
backing the SMICBs, the likelihood that covered bonds may suffer
a late payment following issuer default has increased. Therefore,
the size of the liquidity facilities may not be adequate in all cases
to sustain the rating obtained under the expected loss analysis.
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. Following the the
sovereign downgrade, Moody's has reassessed the maximum rating
uplift:
(a) For callable SMICBs, the limitation has been set at A3 if one
of the participants is rated below investment grade.
(b) For non-callable SMICBs, the limitation has been set
at A3 level if the weighted-average rating of the participants
is below investment grade.
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 or 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:
(i) 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 expected loss 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.
(ii) 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. However, regardless of the size of the
LF, Moody's would not rate any SMICB Aaa if any of the issuers of
the CHs supporting it were rated below Baa3, unless further structural
measures (for example, a reserve fund) were implemented.
SENSITIVITY ANALYSIS
The robustness of a covered bond rating largely depends on the credit
strength of the underlying issuer. A multi-notch downgrade
of the SMICBs might occur in certain limited circumstances, such
as (i) a sovereign downgrade that negatively affects the issuers' senior
unsecured rating; (ii) a multi-notch downgrade of the issuers
or a downgrade to low sub-investment grade; or (iii) a material
reduction of the value of the cover pool.
As noted in Moody's Special Comment entitled "Rising Severity of
Euro Area Sovereign Crisis Threatens Credit Standing of All EU Sovereigns"
(28 November 2011), the risk of sovereign defaults or the exit of
countries from the euro area is rising. As a result, Moody's
could lower the maximum achievable rating for covered bonds transactions
in some countries, which could result in rating downgrades.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's
Rating Approach to 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.
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
agents 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.
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 negative actions on 43 Spanish multi-cedulas
