Spain’s banks issued more than Eu16bn of covered bonds in just 10 days to create collateral for ECB funding, Moody’s said today (Monday), warning that the surge cuts cédulas overcollateralisation levels. Fitch cut six Spanish covered bond programmes today after Moody’s put a swathe on review for downgrade on Friday.

According to Moody’s, CaixaBank on 7 June issued a record Eu11bn of mortgage covered bonds that resulted in a decline of more than one-third of the overcollateralisation of its covered bondholders. Moody’s said the protection available for each euro of covered bonds fell from Eu2.25 to Eu1.80, based on year-end 2011 pool data.

The rating agency said that six other banks joined CaixaBank with a combined Eu5bn of issuance in the 10 day period.

Moody’s said that issuance year-to-date of Eu52bn of Spanish covered bonds equals the annual volume of many previous years, but that issuers have retained almost all this year’s supply, which can be pledged as collateral for ECB funding. The rating agency estimated that 25%-30% of around Eu400bn of Spanish covered bonds outstanding have been retained.

“Because the capital markets are shut for Spain, issuers are maximising the cheap and unlimited funding the ECB provides by issuing covered bonds,” said Moody’s. “Further issuance dilutes the protection covered bondholders have.

“If the cover pool does not grow, but issuance increases, covered bonds’ overcollateralisation decreases, because more covered bondholders have the same rights against the same cover assets.”

The rating agency cited high refinancing needs for 2012 and the risk of deposit outflows as other factors driving the high issuance, saying that there are few funding alternatives apart from pledging government bonds at the ECB.

“The ECB also encourages covered bond issuance because it believes them a liquid debt instrument,” said Moody’. “Hence, covered bonds benefit from lower haircut valuations compared with, for example, securitisations.

“Moreover, the ECB accepts self-issued covered bonds as collateral, but not self-issued senior unsecured debt.”

Moody’s also reiterated a warning from early April that a “drastic” decline in Spanish mortgage lending will reduce overcollateralisation because new mortgage lending will be insufficient to replenish loan redemptions and write-offs of defaulted loans in cover pools.

The rating agency estimates that over the next 18 months there will be an average 30% decline in overcollateralisation of Spanish mortgage covered bonds and warned that banks are nearing statutory issuance limits.

“To get ECB funding with covered bonds, the issuers only need to comply with minimum standards, such as an investment grade rating on the covered bonds or complying with some regulatory minimum criteria, such as the EU location of the issuer or the preferential claim of the bondholders on the cover assets in case of issuer default, something that almost any covered bond fulfils,” said Moody’s.

On Friday Moody’s put 15 single issuer Spanish covered bonds and 55 multi-cédulas on review for downgrade after having cut Spain from A3 to Baa3, on review for further downgrade, on Wednesday. Moody’s said that it is reviewing the degree to which the sovereign downgrade has any impact on their ratings through its expected loss and Timely Payment Indicator (TPI) framework analyses.

Three further covered bonds had the direction of their reviews changed from upwards to uncertain, with 19 further remaining on review for downgrade, while eight further multi-cédulas were already on review for downgrade.

The list of affected single issuer covered bonds can be found here and the multi-cédulas here.

Fitch cut six Spanish covered bond programmes today after downgrading Spain from A to BBB on 7 June and afterwards some of the issuing institutions. Today’s rating actions included:

• Banco Santander cédulas hipotecarias cut from AA- to A, maintained on Rating Watch Negative pending the receipt of complete and updated data set from the issuer
• Banesto cédulas hipotecarias at A and placed on RWN pending the receipt of complete and updated data set from the issuer
• Banco Guipuzcoano cédulas hipotecarias cut from A- to BBB, RWN, and withdrawn to reflect the withdrawal of the issuer’s IDR
• Banco Mare Nostrum cédulas hipotecarias cut from AA- to A-, RWN to reflect the RWN on the issuer’s IDR
• Caja Laboral Popular cédulas hipotecarias cut from A- to AA-, removed from RWN
• Cajamar cédulas hipotecarias cut from AA- to A-, maintained on RWN to reflect the RWN on the issuer’s IDR
• Unnim cédulas hipotecarias cut from A- to BBB+, maintained on RWN pending the receipt of complete and updated data set from the issuer