Fitch has downgraded 44 multi-cédulas from AAsf to A-sf, and assigned them a negative outlook, because it considers that A-sf is the highest stress that can be withstood by a mortgage covered bond issued by any of five so-called “weakest links”. Inadequate OC statements also contributed to the downgrades. [Amended to correct new rating from Asf to A-sf (A minus sf).]

The rating agency removed the ratings from Rating Watch Negative (RWN), where it placed them in December. The rating actions were carried out on Friday.

Fitch noted that there is significant overlap between multi-cédulas transactions because the same cédulas hipotecarias issuers participate in many different deals, and said that this is partly a consequence of the banking system consolidation that has reduced the number of participating issuers from 54 two years ago to 23.

“Fitch believes that the overcollateralisation available for five issuers of CH drives the ratings for the whole sector,” it said. “For these five CH issuers a full recovery of a defaulted CH would not be possible under credit and market stresses higher than those commensurate with the A-sf rating that has been assigned.”

The rating agency therefore refers to these issuers as “weakest links”. Their short term ratings are below F2 (or F2/RWN) and Fitch believes their OC ratios can be volatile as they would currently only have access to collateralised funding.

“Fitch’s analysis established that A-sf is the highest stress that a CH issued by any of these banks can withstand,” it said.

Because all transactions have exposure to one or more of these five issuers all classes of multi-cédulas are assigned the same rating.

The five financial institutions driving the ratings are (by number of affected classes of the 44 rated classes): Unicaja Banco (A-/F2/RWN, 34 classes); NCG Banco (BB+/Stable/B, formerly Novacaixagalicia, 31 classes); Catalunya Banc (formerly CatalunyaCaixa, 18 classes); Banca March (four classes); and Banco de Sabadell (BBB+/RWN/F2/RWN, formerly Banco Guipuzcoano, one class).

The downgrades are also a result of the lack of adequate OC statements, which set limits on the volatility potential of OC ratios of CH issuers with low short term ratings of F3 or below, according to Fitch.

“The rating actions only consider the OC statement made by Banco de Valencia (BB-/Stable/B) by which it commits to a minimum total OC of 99% as other CH issuers were unwilling to provide a strong commitment to maintain the OC at a level higher than the legal minimum,” said the rating agency. “Fitch has consequently considered a haircut OC level for the recovery analysis, as per its criteria.”

In the case of UniCaja, Catalunya Bank, and Banco Guipuzcoano Fitch applied a 30% haircut to total available OC ratios to capture the material risk of OC volatility that could compromise recoveries. It noted that participating banks did not take any voluntary action to support the ratings, such as issuing stronger OC statements or increasing OC ratios during the four months that the sector was on RWN.

In the case of NCG, Fitch analysed the bank’s liquidity position and plans in order to assess the risk of OC volatility, and decided that the prevailing level of OC (103%) can be considered stable. However, it considered a hypothetical minimum OC ratio of 97% assuming that NCG depletes its capacity to issue new CHs, and that the ineligible share of the cover pool is also reduced to some extent.

Fitch considered Banca March’s OC ratio (140%) to be stable and sufficient to produce a full recovery under A-sf stresses, taking comfort in the level of OC, high solvency ratios of the bank, and a business model that is very focused on private banking.

The rating agency applied refinancing spreads ranging from mid-300bps for a base scenario to mid-600s in a AAAsf scenario, noting that the expected settlement market value of cover pools is lower as refinancing spreads have widened in a context of sovereign debt crises. “Fitch now considers higher supporting OC ratios for each issuer and rating scenario than those calculated during the last review, as the agency has updated both its RMBS and SME CLO criteria and has updated the refinancing spreads for each rating scenario,” it said.