Moody’s has cut public sector backed covered bonds issued by Dexia Sabadell from A1 to Baa2 following a four notch downgrade of the Spanish issuer’s rating.

Yesterday (Thursday), Moody’s cut Dexia Sabadell from Baa2 to Ba3, which prompted the covered bond downgrade. The issuer and covered bond ratings remain on review for downgrade.

Moody’s said that the increased expected loss on the covered bonds as a result of the issuer downgrade is no longer consistent with an A1 rating.

In addition, a Timely Payment Indicator (TPI) of “improbable” constrains the ratings of the cédulas territoriales to Baa2 despite a high level of overcollateralisation (65% as of the end of June), said Moody’s.

The outstanding volume of publicly placed Dexia Sabadell covered bonds is negligible, according to a covered bond analyst, with the covered bonds having mainly formed part of the cover pool of Dexia Lettres de Gage Banque or used as substitute assets for Dexia Municipal Agency covered bonds.