Standard & Poor’s downgraded 46 multi-cédulas between one and nine notches yesterday (Monday), surprising market participants by the severity of its actions, with analysts disagreeing with the rating agency’s view on concentration risk in particular.

Caja Madrid, Madrid

The rating agency removed the multi-cédulas, totalling some Eu103bn, from CreditWatch negative. They were put on review in September 2010. Only two issues that were subject to the review retained their AAA ratings.

“People are surprised that we saw as much as a nine notch downgrade,” said Frank Will, senior analyst at RBS. “I did not expect a downgrade to BBB- of some of the transactions. I thought maybe we’d see a downgrade to single-A, but not so close to junk.

“It’s clear that there is something wrong with S&P’s approach if you have downgrades of this extreme.”

Two transactions, for example an AyT Cédulas deal launched in March 2007, fell to BBB-.

“It was issued based on our perfect world environment we had back then,” said Florian Hillenbrand, senior analyst at UniCredit. “Going from as high as AAA to BBB- is tough, but rating agencies tend to do tough calls these days and S&P usually comes around with the toughest calls since they base their assessments on Probability of Default rather than on expected loss.”

S&P cited deterioration in the credit quality of the financial institutions behind the multi-cédulas between 2008 and 2011 as the main reason for the downgrades. In 2008 71.93% of issuers were rated higher than bbb/BBB (credit estimate or rating), but by 2011 the number in that category had dropped to 27.27% (see table below for more details).

Along with an amplified credit risk, the rating agency said a consolidation within the Spanish savings banks sector had heightened concentration risk of the multi-cédulas and increased the impact of an individual financial institution on the corresponding multi-cédulas.

Analysts found fault with this reasoning, saying the merger of banks that had occurred in Spain had likely done more good than harm.

“They didn’t take into account the medium to long term benefits of the mergers,” said Will at RBS. “I can’t understand the reasoning behind S&P’s views.”

Dries Janssens, fixed income strategist at Dexia Capital Markets, agreed that the merger of the institutions was more likely to have enhanced credit quality than negatively affected it.

“The S&P report seems to put more emphasis on the deterioration of the creditworthiness of the cajas, than on the positive effects of consolidation and recapitalisation,” he said.

Will added that S&P had not taken into account the “massive” overcollateralisation levels on the multi-cédulas.

The rating actions also came as a result of the adoption of an updated version of S&P’s credit risk model, which addresses updated default rate stresses, correlation assumptions, concentrations risks, and model risk.

S&P said the credit enhancement to cover possible interest shortfalls in 46 of the 48 transactions analysed “would not be sufficient to pay interest on all bonds to a AAA rating level if a cédulas defaults”.