Fitch placed cédulas hipotecarias issued by NCG Banco on Rating Watch Negative yesterday (Thursday), a day after carrying out the same action on the issuer because it considers there to be greater risk that an orderly resolution could take place with some form of default or “restricted default” arising.

Fitch rates NCG Banco BB+ and the cédulas BBB+.

On Wednesday it said that it believes there is a moderate probability that the bank will continue to be supported by Spain’s Fund of Orderly Bank Restructuring (FROB) with the ultimate goal of restoring the bank’s viability, but that there is heightened risk that an orderly resolution could take place because of NCG Banco’s problems and high recapitalisation needs.

“This could include a recapitalisation plan for NCG’s future sale, but also alternative scenarios that, even if customer depositors are fully compensated as the agency would expect, could still qualify as some form of default or ‘restricted default’ under Fitch’s definitions and criteria,” it said.

Fitch noted that NCG has relatively few non-customer deposit senior unsecured liabilities on which it might be considered politically acceptable or rational to enforce losses.

Fitch’s rating of the cédulas is mainly based on NCG’s issuer rating, a Discontinuity Cap (D-Cap) of 1 (very high risk), and an overcollateralisation ratio of 72%. It said that the resolution of the RWN on the covered bond ratings will depend on NCG’s recapitalisation plan and the resolution of the RWN on the issuer rating.

The rating agency will be monitoring mortgage transfers to a bad bank (Asset Management Company) by Spanish issuers, which it said would likely lead to sizeable reductions in the amount of mortgage loans securing cédulas hipotecarias.

“This would cause a drop in OC ratios, but could partly be offset by the lower risk of the remaining cover pool,” it said. “The agency will investigate the resulting effect upon clarification of the profile of the assets to be transferred.”