Standards & Poor’s upgraded mortgage covered bonds issued by NCG Banco (Novagalicia) from BBB to BBB+ yesterday (Wednesday) because of its assessment that after a transfer of assets to Spain’s bad bank and early redemptions the programme’s overcollateralisation was consistent with a higher rating.

S&P said that as part of the Spanish government’s restructuring plans for Spanish financial institutions Novagalicia transferred its impaired assets to Sareb in December 2012, with its non-residential mortgage loans decreasing from Eu11.6bn to Eu4.06bn.

“In our view, this has significantly improved the quality of the mortgage book, and non-residential mortgages now represent 21.6% of the total mortgage book, compared with 43.7% previously,” said S&P. “These factors had a positive impact on our credit analysis because we apply higher stresses to the non-residential mortgage book.”

The rating agency also noted that at the same time the amount of outstanding covered bonds declined from Eu11.96bn to Eu9.25bn following some early redemptions.

As a result, S&P said that it considered the level of overcollateralisation of the programme as consistent with a higher rating and therefore upgraded the cédulas from BBB to BBB+.

The rating was removed from CreditWatch Negative but kept on negative outlook, as S&P said that, all else remaining equal, any change in the issuer’s creditworthiness or the overcollateralisation levels would lead to a downgrade of the covered bonds.