Fitch placed two multi-issuer cédulas hipotecarias (MICH) transactions in which Banco de Valencia participates on Rating Watch Negative (RWN) yesterday (Thursday) following the bank’s breach of an overcollateralisation commitment. The rating agency said the outcome of the review could have implications for the way in which OC commitments from lowly rated banks are treated.

The MICH issues are IM Cédulas 2 and Cédulas TDA 13.

Fitch said Banco de Valencia (rated BB-) breached its 132% overcollateralisation commitment with a level of 119% as of August, according to its own reports – this after the bank issued a total of Eu1bn in July and August. The overcollateralisation is calculated as the balance of the cover pool, added Fitch, minus the balance of outstanding cédulas hipotecarias, divided by the balance of outstanding cédulas hipotecarias.

Fitch said that there is a “material risk” that overcollateralisation would be further reduced due to the issuer facing “tight liquidity”, and any reduction could fall below the overcollateralisation of 116% needed to support the MICHs’ AAsf ratings.

“BV’s liquidity is challenged in the context of the difficulty Spanish banks have accessing the wholesale market,” said Fitch.

The rating agency said the AAsf rating on the two affected transactions would likely be downgraded if the issuer failed to increase its overcollateralisation ratio in December.

Fitch added that it expected participants in MICH transactions “to comply with their overcollateralisation commitments and the resolution of this case could undermine the credit that the agency currently gives to the overcollateralisation commitments of lowly rated banks”.

Cédulas hipotecarias issuers rated F3 or below may see greater overcollateralisation volatility according to the rating agency and consequently Fitch does not credit the total mortgage portfolio in its supporting overcollateralisation analysis.

“OC cushions are dynamic and issuers with a weaker credit profile may have limited funding alternatives and hence need to issue new cédulas hipotecarias or securitisations, eroding OC levels, potentially down to the legal minimum of 25% on the eligible cover pool set by the Spanish cédulas hipotecarias legal framework,” said Fitch.