Standard & Poor’s downgraded mortgage covered bonds issued by Spain’s Bankia from AAA to AA, on negative outlook, yesterday (Tuesday) because it last week cut the issuer’s rating from BBB+ to BBB-.

The downgrade to the issuer rating directly affected the cédulas hipotecarias rating because the latter incorporates the maximum possible uplift from the issuer rating under S&P’s methodology.

S&P allocates Spanish covered bond programmes to Category 1 under its rating methodology, and has assessed Bankia’s mortgage covered bonds as featuring “low” asset-liability mismatch (ALMM) risk. The combination of these two aspects allows the covered bonds to be rated up to seven notches higher than the issuer.

The rating agency said that based on the application of credit and cashflow stresses from the latest information it received from Bankia the overcollateralisation of the issuer’s cédulas hipotecarias is sufficient to support the maximum uplift.

“As these covered bonds already benefited from a seven notch ratings uplift above our rating on Bankia as the sponsor bank – the maximum uplift allowed under our criteria – our downgrade of Bankia on February 13 has directly affected our ratings on the covered bonds,” said S&P.

The rating agency removed the covered bonds from CreditWatch Negative and assigned them a negative outlook to reflect that any further rating action on the issuer would automatically lead to a corresponding rating change on the covered bonds that Bankia has issued, all things remaining equal.