Spanish banks participating in multi-issuer cédulas hipotecarias (MICH) must make public commitments to overcollateralisation levels necessary to support ratings if most of the sector is not to face cuts to the single-A level, Fitch stressed in its latest OC Tracker publication today (Friday).

The rating agency will conclude a review of the sector at the end of March.

Fitch put the covered bonds on Rating Watch Negative (RWN) in December because of expected overcollateralisation (OC) volatility in the absence of OC statements by CH issuers with a low short term rating (F3 or lower), which feature in most MICH transactions. Fitch does not give credit to total overcollateralisation for such issuers because it says actions to obtain liquidity would reduce OC.

“The agency anticipates that banks under tight liquidity may see their OC ratios reduced, as they will be under pressure to issue new CHs, mortgage bonds or securitisations in order to obtain discountable assets with the ECB,” said Fitch. “The weighted average OC has fallen to 144% down from 154% since the last version of this report in summer 2011.”

Meanwhile, supporting overcollateralisation levels have risen and Fitch said that the average distance between total OC and supporting OC ratios has decreased from 96% in March 2011 to 55%, considering AAsf scenarios.

“The CH issuers need to decide whether they will limit the potential volatility by issuing OC statements to provide comfort that future funding decisions will not reduce OC ratios below a certain committed level,” said Fitch.

The rating agency said that there is no OC statement at present for 10 CH issuers rated below F2 or rated F2 and on RWN, and for six others OC statements may have become outdated.

“The agency clarifies that no credit is now given to private best-effort declarations,” added Fitch. “This follows the breach of one such statement by Banco de Valencia in summer 2011, which caused Fitch to place two MICH deals on RWN.”

MICH rated by Fitch are in the AAsf category comprise 41 transactions totalling Eu94bn backed by cédulas hipotecarias issued by 24 Spanish financial institutions.