Moody’s is reviewing for downgrade the rating of mortgage covered bonds issued by Unicaja and for upgrade those of Caja España de Inversiones Salamanca y Soria following approval of a merger of the savings banks.

The rating agency announced the reviews yesterday (Wednesday), a day after having placed on review for downgrade and upgrade, respectively, the unsecured ratings of Unicaja and Caja España (CEISS).

Moody’s rates Unicaja A1 and Caja España Baa3, and their respective mortgage backed covered bonds Aaa and A1.

Unicaja and Caja España are due to merge to create a new commercial bank, to which the savings banks will transfer their assets and liabilities save social welfare operations.

The new entity will assume obligations under the outstanding cédulas hipotecarias issued by the merging entities, said Moody’s, with the covered bonds backed by a cover pool resulting from the amalgamation of the savings banks’ total mortgage loan portfolios.

The approval of the merger was one of the reasons that prompted Moody’s to review the ratings of the savings banks’ mortgage covered bonds, said the rating agency.

“Moody’s decision to place Unicaja’s cédulas hipotecarias Aaa ratings on review for downgrade is also driven by Moody’s view that the combined entity that will emerge after the integration with CEISS is likely to have a weaker credit profile than Unicaja’s standalone credit strength,” it added.

The Aaa rating of Unicaja’s cédulas hipotecarias could therefore be constrained by timely payment considerations, it said.

“Based on the current TPI [Timely Payment Indicator] of ‘probable’ for both programmes, if the new entity’s senior unsecured long term rating is rated at A3 or above, the covered bond rating could achieve Aaa, all other variables being equal,” said Moody’s.

The rating agency said that it believes the new group will have stronger financial fundamentals than those displayed by Caja España, and that it therefore is reviewing for upgrade the ratings of Caja España’s cédulas hipotecarias.