Fitch removed Santander mortgage covered bonds from Rating Watch Negative (RWN) yesterday (Tuesday) after receiving updated data on the credit trends of the underlying mortgage pool and reviewing the issuer’s origination and servicing strategies during an operational visit to the Spanish bank.

Santander’s cédulas hipotecarias (CH) were cut from AA-/RWN to A/RWN on 18 June 2012, with the RWN pending until Fitch received complete mortgage information.

“Fitch has received cover pool data aggregated by sub-pools depending on the borrower profile and property type among others (residential 57%, commercial 26% and real estate developers, 17%), which the rating agency has deemed adequate given that the CH are rated on a recovery given default basis,” said Fitch.

Fitch also conducted an operational visit to Santander in October and discussed with the management team mortgage origination and servicing strategies in the context of the economic crisis, and reviewed the IT system used by Santander to manage and report on the mortgage pool.

Fitch affirmed Santander’s CH at A with a negative outlook. The rating agency said the cédulas’s negative outlook is driven by the negative outlook on Santander’s long term issue default rating (IDR) of BBB+. Santander’s IDR was cut by two notches from A in June 2012, following a downgrade of the Spanish sovereign from A/Negative to BBB/Negative .

The programme has a Discontinuity Cap (D-Cap) of 0, indicating a high likelihood of an interruption in payments in case of issuer insolvency. The 0 D-Cap means that the covered bonds can only be rated up to two notches above Santander’s BBB+ IDR, with any uplift based on recoveries from the cover pool given a default of the issuer.

Fitch assessed a 85% of overcollateralization ratio for the CH based upon a 10% haircut on the minimum observed OC level over the past 12 months (94%) because there is not a contractual minimum level of OC and given Santander’s F2 short term rating. Fitch’s estimated breakeven OC ratio in an A stress environment is 75%.