Fitch cut to BBB and withdrew the rating of cédulas hipotecarias issued by Cajamar and effectively transferred the rating to Cajas Rurales Unidas’ (CRU) cédulas hipotecarias, saying that Cajamar was the main contributor to CRU’s cover pool after a merger that led to its creation.

CRU is a new entity formed by a merger between Cajamar (Cajamar Caja Rural, Sociedad Cooperativa de Credito) and Caja Rural del Mediterraneo Ruralcaja, Sociedad Cooperativa de Credito (Ruralcaja) in November. After the merger was finalised, Fitch withdrew Cajamar’s issuer default rating (IDR) rating, then transferred the rating of its mortgage covered bond programme to CRU’s because Cajamar was the leading and larger entity of the merger, contributing 77% of CRU cover pool, and influencing policies and procedures.

Fitch noted that the merger did not lead to an increase in the outstanding volume of cédulas (Eu6.1bn) as Ruralcaja had not previously issued covered bonds, but the cover pool increased from Eu14.4bn to Eu18.8bn following the merger of the banks’ assets, with overcollateralisation reaching 208%.

Given the absence of a contractual minimum level of OC, for its OC stress testing Fitch considered the lowest OC observed in the past 12 months and applied a 30% haircut to derive a credited 145.9% OC level. The breakeven OC ratio for a BBB rating of the CRU mortgage covered bonds is 65.1%.

The rating agency said that the credit quality of the cover pool has not materially changed following Cajamar’s merger with Ruralcaja. However, the cédulas are considered to be exposed to maturity mismatches, as the covered assets have weighted average residual life of 11.4 years, while the cédulas have a residual life of 4.3 years.

Given a Discontinuity Cap of 1, (very high discontinuity risk) the BBB rating of CRU’s covered bonds benefits from the maximum uplift over the issuer rating (BB). A downgrade of CRU would lead to a downgrade of the covered bond programme, said Fitch.