Fitch downgraded six Spanish covered bond programmes yesterday (Tuesday) following a cut in the Spanish sovereign’s rating to A, at which level the rating agency is capping the ratings of the cédulas on a probability of a default basis in an exception to its methodology.

Five of the programmes were placed or maintained on Rating Watch Negative (RWN) while Fitch recalculates overcollateralisation pending redetermination of refinancing costs and receipt of full and updated data.

The rating agency also affirmed cédulas hipotecarias issued by Banco Mare Nostrum, at AA-, and placed those issued by Unnim on Rating Watch Negative (A-). These programmes’ ratings on a probability of default (PD) basis were either already at A (Banco Mare Nostrum) or below this level (BBB in the case of Unnim’s programme).

Mortgage backed programmes of six issuers were downgraded:

Banco Santander, from AA+ to AA-, maintained on RWN –

Banco Guipuzcoano, from AA to AA-, maintained on RWN to reflect the same status of the Issuer Default Rating (IDR)

Banco Popular Español, from AA to AA-, maintained on RWN to reflect the same status of the Issuer Default Rating

Banesto (Banco Español de Credito), from AA- to A, removed from RWN

Caja Laboral Popular, from AA+ to AA-, maintained on RWN

Cajamar, from AA to AA-, placed on RWN

Fitch on 27 January downgraded the sovereign from AA- to A and subsequently took negative rating actions on some of the issuing institutions. It said that the RWN status on some of the affected cédulas programmes reflects the recalculation of overcollateralisation levels pending redetermination of refinancing costs and receipt of a full and updated data set from the issuers.

The downgrade of the six programmes reflects Fitch capping their ratings on a probability of default (PD) basis at the long term IDR of the Spanish sovereign (A), which the rating agency said is an exception to its covered bonds rating methodology.

Fitch said that a lack of liquidity mitigants in the cédulas hipotecarias “template” exacerbates the risk of non-payment on the covered bonds in case of an issuer defaulting just before a bullet payment is due. In its view, this means that the timing of an issuer default may not occur sufficiently apart from the due date of a cédulas hipotecarias issue to allow an administrator to gather enough cashflows from the natural amortisation of the cover pool to redeem principal on a hard bullet maturing mortgage backed covered bond.

However, the rating agency considers that an intervention by the Spanish authorities to avoid a default on a cédulas hipotecarias issue is likely, because of the importance of the funding tool for Spanish financial institutions.