S&P yesterday (Tuesday) cut mortgage covered bonds issued by Banco Popular Español and placed mortgage covered bonds issued by Kutxa on CreditWatch Negative following negative rating actions on the respective Spanish issuers.

Banco Popular Español’s mortgage covered bonds were lowered from AAA to AA+ and remain on CreditWatch negative following a downgrade of the issuer from A- to BBB+ on 15 December.

The covered bonds were affected by the issuer downgrade because they already benefitted from a maximum six notch ratings uplift above the rating on Banco Popular Español available under the rating agency’s methodology. S&P has assigned the programme to Category 1 and determined a “moderate” asset liability mismatch (ALMM) classification.

A change of the ALMM classification to “low” would increase the maximum achievable ratings uplift about the rating on the issuer to seven, and would allow for a maximum potential rating of AAA on the covered bonds. But the ratings on the sponsor bank are on CreditWatch negative and could be lowered by one notch, said S&P, which would directly affect the ratings on the bank’s mortgage covered bonds, even if the ALMM classification was “low”.

“We do not expect the ALMM risk of the mortgage covered bonds to change in the short term,” said the rating agency. “In our view, an increase of the assets to improve the ALMM classification is unlikely, because the collateral already includes all the mortgage loans on Banco Popular Español’s balance sheet.”

S&P added that it is unlikely that the issuer can redeem covered bonds early to a degree necessary to decrease the ALMM risk to allow for a classification of “low”.

The rating agency expects to affirm or to lower by one notch the ratings on Banco Popular Español’s mortgage covered bonds.

Kutxa’s covered bond rating is expected to be affirmed or lowered by one notch according to S&P, following the resolution of the CreditWatch negative on the BBB+ rated issuer.

Given S&P’s view of the Spanish legal framework, it has categorised Kutxa’s mortgage covered bonds in Category 1 and assigned a “low” ALMM classification. This enables the rating agency to assign a maximum potential ratings uplift to the covered bonds of seven notches above the rating on the issuer. Kutxa’s AAA rated covered bonds benefit from the maximum uplift under the rating approach, meaning a downgrade of the issuer would directly affect the ratings of the covered bonds.