Triple-A rated mortgage covered bonds issued by Banco Popular Español were placed on CreditWatch negative by Standard & Poor’s yesterday (Thursday) after the issuer was placed on review for downgrade.

S&P placed Popular’s rating on CreditWatch negative on 11 October following an announcement from the issuer that it was launching an exchange offer for 100% of the common shares and mandatory convertible notes of Spain’s Banco Pastor.

“The CreditWatch status reflects our view that the potential acquisition of Pastor,” it said, “despite somewhat benefitting Popular’s business profile, may further erode what we view as the already strained financial profile of Popular.”

S&P said that if the long term ratings were downgraded, they could be lowered by a maximum of two notches.

Popular’s cédulas hipotecarias could support a maximum six notch uplift above the long term issuer credit rating (ICR) on Popular, which is A-, based on a current asset-liability mismatch (ALMM) classification of “moderate”.

“Given that the current uplift of the ratings on the covered bonds from the ICR is a maximum of six notches,” said the rating agency, “the covered bonds do not benefit from any unused notches of uplift.

“Therefore, a downgrade of the issuer will currently lead to a downgrade of the covered bonds, all other things being equal.”

S&P said the acquisition could cause the mortgage book composition, liabilities maturity profile, and characteristics to change.

It said it would therefore need to review in detail the combined mortgage book and covered bonds in order to assess the maximum achievable ratings on the covered bonds.