Standard & Poor’s downgraded 29 multi-cédulas on Friday, with four pushed into junk territory by multi-notch cuts and one of these losing ECB repo eligibility. The rating agency then cut Bankia this (Monday) morning from BB to BB-.

S&P’s downgrade of 29 multi-cédulas programmes reflected the rating agency’s view of increased credit risk following recent negative rating actions on Spanish financial institutions and covered bonds, or revisions of credit estimates on issuers, the rating agency said.

“Based on our latest analysis, we believe the credit enhancement to cover possible interest shortfalls in 29 multi-cédulas would not be sufficient to pay interest on all of the bonds at their rating level before today’s downgrades if a cédulas issuer were to default,” it said.

Florian Eichert, senior covered bond analyst at Crédit Agricole noted that the downgrades were mostly in the one notch range, but that following four multi-notch downgrades four programmes were cut to sub-investment grade, namely AyT Cajas Global VIII, from BBB- to BB+, AyT Cajas Global XIII, from BBB- to BB+, Cédulas TDA VII, from BBB- to BB+ and IM Cédulas 5, from A- to BB+.

Eichert highlighted that IM Cédulas 5 is only rated by S&P, meaning that as a result of the drop to junk the bonds are no longer ECB repo eligible.

Bernd Volk, head of covered bond research at Deutsche Bank, said that while the overall market impact of the S&P rating action will likely be limited at this stage, IM Cédulas 5 could face selling pressure if IM Cédulas takes no action.

He added that rating pressure remains high, noting that Fitch adjusted loss assumptions for Spanish residential mortgage loans last Wednesday.

S&P also affirmed 18 multi-cédulas and upgraded four in its rating actions on Friday.

The affirmations came because of the rating agency’s view that these programmes have a liquidity line that could cover potential interest shortfalls for the maximum recovery period, or have short remaining maturities that compensate for the negative effect of the rating actions on Spanish financial institutions. S&P noted that the ratings of many of these programmes are capped at AA- under the rating agency’s criteria for rating issuers higher than the related sovereign.

The upgrades of four multi-cédulas took into account the positive impact of their upcoming maturities, which counteracted recent negative movements in the underlying collateral, said S&P.

Volk noted that S&P multi-cédulas ratings vary between AA- and BB+, while Fitch rates all multi-cédulas BBB.

“Given the challenges of clearly differentiating between different multi-cédulas series, we argue that the rating range at S&P is too wide,” he said.

The one notch downgrade of Bankia to BB- reflected S&P’s assessment that the bank’s capital strengthening measures – namely the conversion of Eu6.5bn of hybrid debt into equity as part of recapitalisation and restructuring plans – will not be as great as the rating agency previously expected.

S&P said that the rating action also took into account the financial impact on the group of high losses reported at year-end 2012, the completion of a state capital injection, and a transfer of problematic assets to Sareb, Spain’s bad bank.

S&P noted that that Bankia’s BB- rating still benefits from three notches of uplift over the bank’s standalone credit profile to reflect short term government support and from one notch to reflect extraordinary government support.

The ratings of Bankia and parent Banco Financiero y de Ahorros were also put on negative outlook as a result of the risk of Spain’s operating and financial environment becoming more difficult than the rating agency currently anticipates, said S&P.