Fitch revised from negative to positive the review status on cédulas hipotecarias issued by Banco Español de Crédito (Banesto) yesterday (Wednesday) in anticipation of upgrading their rating once a merger with Banco Santander is completed.

The rating action followed the announcement on 17 December that Banesto will be absorbed by its parent, Santander.

“Fitch understands Banesto will cease to exist as a separate legal entity after transferring all of its assets and liabilities to Santander, including those related to the covered bond business,” said the rating agency.

After the completion of the merger, which is expected to happen in May, Fitch said it will probably upgrade Banesto’s mortgage covered bond programme from A- to A to equalise the rating with that of Santander cédulas hipotecarias.

Conditions for an upgrade, according to Fitch, are that Santander stays rated BBB+, that the post-merger level of overcollateralisation ranges between 90% and 95% at a minimum, and that Fitch’s breakeven OC analysis does not change materially.

Fitch said that based on the information provided by the two issuers, after the merger an outstanding total amount of Eu43.8bn cédulas will be secured by an aggregate cover pool of Eu83.3bn, resulting in a OC level of 90%.

Under Fitch’s methodology, in the absence of committed OC a haircut of 10% is applied on the lowest OC observed in the previous 12 months. Fitch said that as a result the credited OC level deriving from the two cover pools would be 79%, which is above an estimated breakeven OC level (76%) consistent with an A rating.