Fitch cut mortgage covered bonds issued by Banco Español de Crédito (Banesto) from A to A- yesterday (Thursday), but the Spanish bank avoided a further downgrade after the rating agency made an exception to its methodology.

The downgrade followed the receipt of updated cover pool data and Fitch said it estimates the level of OC at 77%, against an OC breakeven for a A rating scenario of 86%. Despite the breakeven for the A- rating scenario being 81%, Fitch did not downgrade the cédulas further because it considered plans to increase OC presented by Banesto as likely to be effective. The cédulas have been maintained on Rating Watch Negative until the plans are implemented.

“Based on detailed information received from the issuer regarding the cover pool projected size, the covered bond scheduled redemptions and an estimate of potential mortgage covered bonds issuances for the year 2013, Fitch understands the total OC will increase during 2013 to approximately 90%,” said the rating agency.

Fitch added that this is an exception to its covered bond rating criteria, which, in cases where there is an absence of committed OC and the issuer is rated F2 or lower, would prescribe taking into account the lowest OC level observed in the previous 12 months. Fitch said that the exception is justified by the “visibility” of the measures that Banesto plans to take, the bank’s liquidity, and the difference between the cédulas’s rating and Banesto’s (BBB+) being only one notch.

Fitch also said that by analysing the updated cover pool data it had received it could estimate that 66% of the cover pool is linked to residential credit risk profiles, 14% to commercial/SME credit profiles, and 20% to real estate developers.

Fitch estimates a total cover pool weighted average default rate of 33.1%, a weighted average recovery rate of 32.9%, and weighted average loss rate of 22.2% in an A- stress environment.